GST Has Made MSMEs Grow Beyond Boundaries

In a chat with Swaminathan Balasubramian of CyberMedia Research, Piyush Khaitan, MD & Co-founder, NeoGrowth shares his view on how MSMEs are taking part in Indian growth and how they’re are managing to thrive. Edited Excerpts.

The SME segment witnessed turbulent times during the last financial year with headwinds coming from the combined effects of demonetization and Goods and Service Tax (GST). The implementation and compliance issues caused immense pains in the system and made this segment scamper for more liquidity. NeoGrowth used this opportunity to strengthen relationships with merchants who were in the need of more liquidity and extended the needy with imperative credit lines and played a major role in their financial resurrection and financial inclusion. In a chat with ‘The Unstoppable’ Forum, managed by CyberMedia Research, Piyush Khaitan (PK), MD & Co-founder, NeoGrowth shares his view on the ways MSMEs are taking part in Indian growth and how the MSMEs are managing to thrive. Edited Excerpts.

1. There is a general view that post-GST, Indian SMEs are struggling for their survival. What is the actual scenario of the SMEs in India post-GST? 

Without a doubt, the SME sector is one of the largest drivers behind India’s economic growth story. As per a Morgan Stanley report, the Indian Economy is expected to reach USD 5 trillion by 2025, and with the recent Govt. announcement on boosting the contribution of MSMEs from existing 30% to 50% of GDP, the MSMEs are expected to play a crucial role in India’s growth story. The implementation of GST has brought in ‘One nation, One tax’ system but the effect varies from industry to industry.

During the FY2018-19, the MSME segment faced some challenges with cashflows and compliance with the implementation of GST.  However, post GST implementation, the realization of benefits has started. MSMEs can now go beyond their geographical limits and expand their business anywhere in the country. MSMEs no longer have to worry about dealing with complex tax structures applicable in different states. The economy is gradually shifting towards more formalization and digitization and creating more opportunities for this segment. NeoGrowth has put in place appropriate products and processes to cater to all the financials needs of MSMEs through its suite of products. The entire ecosystem of GST with increasing adoption of digital payment modes and formalization has boosted small and medium businesses to run their businesses in India with less complexity and less compliance requirements.

2. While the GST returns and refunds are becoming a challenge, how you see the trends in maintaining the cash flow among the SMEs in India?

The implementation of ‘One nation, One tax’ regime has not been an easy ride for the MSMEs, faced with challenges in cash flow and GST compliance. However, the implementation of one single tax has streamlined the processes kicking in more transparency in accounting procedures. This has resulting in surge of financial participation from lenders and there is noticeably far more flexibility in business cycles as well as ease in the cost of borrowing for these MSMEs.

3. What are the key unique aspects of NeoGrowth credit compared to other loan lenders? 

At NeoGrowth, we offer unsecured loans to merchants who accept card or any other form of digital payments from customers. Our product design is centered around the business model of the retailers as swipes on a POS machine give a good sense of the business potential, seasonality changes and customer footfalls in terms of underwriting. We consider performance of the business rather than just the credit score of an individual. Our proprietary risk scorecards built on basis of deep analytics and insights into customer behavior enable us to assess the risk of non-performance of a loan upfront itself and thus, we give loans to not only those who are not bank credit-worthy but even the new-to-credit segment. And the differentiating factor is that this product has a daily recovery model and is digitally driven.

4. How does your financial structure work in terms of payment and repayments?

NeoGrowth collects payments daily – nearly all our loans are daily repayment loans. Majority of our loans have repayments exclusively from the terminal settlement which further mitigates the risk of default. This lending model ensures a high collection efficiency of over 98%. The company has automated daily monitoring capabilities for all loans, including loans which are non-daily repayment based. Innovative scoring and monitoring tools are used to identify trigger events which strengthens collections within as early as 3 days of non-payment.

5. What type of companies can approach you and what are the basic criteria you have for providing credit for SMEs?

At NeoGrowth, we have served retail MSMEs pan India from over 65+ industries with top contributing segments being food & beverages, apparels, petrol pumps, groceries, spa and salons, pharmacies, kirana stores, hotels and many more. NeoGrowth has touched upon 55,000+ customers since inception.  Our financing not only helps our customers grow but also drives financial inclusion making a positive social impact.

At NeoGrowth we lend to Consumer Facing SME Retail Businesses, and many of these do not have proper financial statements. Our research shows that the risk of business failure in these businesses is also very high, especially in the first 3 years of inception. At NeoGrowth we use an innovative approach to underwrite these loans. We use technology to parse one year of digital bank statement data, and gain insights into daily card-based sales for the last 365 days. We then use proprietary algorithms to build predictive models into the future sustainability and growth of the business. This helps us determine the eligibility for loans and create a bespoke offering in terms of loan amount, tenure and pricing.

6. What according to you are the Sunshine industries in India which you bet on? Keeping in mind, the Indian media and social media is saying about the economical slow-down?

With signs of slowdown being faced currently in the economy, there has been an overall slump. We, at NeoGrowth, lend to consumer facing MSME retailers. Our robust selection framework ensures the right selection of customers even in a weakened credit environment. Also, the composition of our originations has remained in the same in the last 6 months.

There are few industries which are much more affected by slowdown while some have steady growth even during sluggish periods.

7. How do you see the growth of SMEs in the Tier-2 and tier-3 cities?

At NeoGrowth, during the FY2018-19, 17% of the total loan disbursals were towards businesses in Tier II cities and we are planning to deepen our business activity in Tier-II and Tier-III cities. With increasing focus of the Govt. on empowering MSMEs by several initiatives, it cannot be ruled out that the next level of growth will emerge from India’s Tier-II and Tier-III cities.