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Mohit Sahney

Mohit Sahney, Managing Director & CEO, Finova Capital.

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How Cluster Based Study Helping NBFCs to Target MSMEs

Clustering is an approach adopted by the new-age financial companies to streamline the process of making credit accessible to the MSMEs.

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Small Business

Even in the face of adversities, the MSME sector has showed enough promise in the past. Located across the remote locations in India, the MSMEs in India manufacture up to 10,000 different kinds of products and are responsible for employing over 42 million people, hence, bringing about sustainable growth and overall development of India. However, even as the digital wave is sweeping across the nation, the MSMEs lack the required access to business credit for taking their business to the next level. As per industry reports, the industry is currently facing a credit deficit worth INR 3 trillion. In the face of such massive potential and a colossal demand, cluster-based approach to business funding for seems to be the need of the hour for Indian MSMEs.

Understanding Cluster-Based Approach for MSME Funding

Clustering is an approach adopted by the new-age financial companies to streamline the process of making credit accessible to the MSMEs. In its simplest form, clustering organizes the diverse businesses into multiple groups with similar data points. Fundamentally, the process entails segregating businesses with similar traits into a unified group, in order to streamline the challenges and opportunities available for the same.

The cluster-based approach is increasingly gaining steam in India. Under the Scheme of Fund for Regeneration of Traditional Industries (SFURTI), and Micro and Small Enterprises Cluster Development Programme (MSE-CDP), the Ministry of Micro Small and Medium Enterprises has approved a list of clusters in 121 Minority Concentration Districts. Furthermore, the United Nations Industrial Development Organization (UNIDO) has recognized 388 industry clusters spread over 21 states in the country.

The Unique Benefits of Funding MSMEs via Industry Clusters  

Since most of the MSMEs are operating in unstructured & unorganised fashion, their credit assessment happens on the basis of cash flow analysis, given the absence of documented income. In the absence of historical data and the staggering credit deficit worth 3 trillion, NBFCs try to develop cluster lending approach in order to gain deep insight into each segment and better understand the area. The cluster-based approach helps financial corporations discover patterns amidst the scattered group of MSMEs and systematically make funding available. As a practise, the approach is more prudent for:

  • Making the required information available for successfully funding the low scale businesses that tend to lack proper documentation
  • Adequately monitoring the funds provided by the lending platform
  • Reducing the costs of providing credit
  • Dealing with a large number of MSMEs by organizing them into well-defined and pre-organized groups.

Moreover, referencing becomes easy for lender. When their experience become positive over the period of time with a particular segment or a cluster, NBFCs tend to establish their own structures and deep learning models around the same. This enables NBFCs to take a call while providing funds to other businesses operating in the same cluster.

In addition to making the right call, cluster based approach also helps in strengthening the entire ecosystem revolving around the particular type of businesses and bringing in the economies of scale. There is a feeding industry that revolves around MSMEs, with several ancillary units catering to the same or similar ecosystem. Adopting a cluster-based approach helps in feeding the entire ecosystem of MSMEs and the ancillaries.

Lastly, the cluster-based approach provides a data centric and scientific means for the NBFCs to appraise the payback ability. As an emerging best practice for the industry, it gives a much required break from the erstwhile credit appraisal methods practised by numerous institutions when lending to the MSMEs.  This approach not only brings in efficiency but cut across lots of time involving in appraisal process. As technology is the foremost enabler of growth, certain incubation centres can be set up within these clusters to provide highly precise technical innovations and solutions to enterprises operating in respective clusters.

In essence, the cluster-based approach provides a unique way for NBFCs to template credit buying process, further providing them an opportunity for marrying technology with the brick and mortar model, an alliance that is ideal in the Indian scenario.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house


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Cluster Based Study nbfcs msmes

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