Jubilee Post News & Views
Anand Prakash Srivastava
The credit gap in India for MSME sector is estimated at around Rs. 25 trillion. Despite all the enabling laws, subsidies and relief measures granted by the government, the credit gap for MSMEs persists. On the other side, portfolio health and fear of NPAs remain a cause of concern for most of the lenders, especially in post corona times. Yet, given the huge employment generation potential of the MSME sector, it is imperative that the banks and NBFCs keep growing their MSME portfolio while maintaining low level of non-performing loans.
This is easier said than done, but the experience of SIDBI shows that through regular product innovation, a business of Rs 2500 crore can be created in less than two years with almost zero NPAs.
To develop a strong, healthy MSME loan portfolio through product innovation, banks and NBFCs need to understand the basic considerations which are used while designing a new product. There are 12 key elementsthat usually go into product design. These are: Purpose, Simplicity, Positioning, Speed, Return Expectation, Risk Containment, Operational Ease, Scalability, Marketing Plan, Delinquency, Expected Loss and Competitor’s products. Let us elaborate each,one by one.
Purpose
Every product is driven by a purpose. If it is not clear why we are designing a particular product, we will never reach the audience. Dan Moultrie while describing the tactics for banking product development asks : Does everyone involved in product development at your bank understand why you are changing products? He lists ‘purpose’ as the number one consideration.
When I was working on the design of SPEED, a new product for financing industrial machinery, our central idea was to deliver a loan within a given number of days. In other words, devising a quick machinery loan product with a low TAT was our main purpose. Once that was decided, all the detailing was oriented towards how to cut short the delivery time and where to position it.
Simplicity
We can build a lot of features into a product, but if it is not simple, the customers don’t like it. The thumb rule is : if a platform banker can’t explain a product in three sentences or less, it’s too complicated (Dan Moultrie, 2015). For example, when SIDBI brought out a product called LOGIC (Loan Against GST Input Credit) for its existing customers – its 3 sentences were (i) It’s a loan against outstanding GST input credit (ii) No collateral is required, extension on existing security would be good enough, and (iii) All you have to do it bring your Balance Sheet and GST Return 2A which shows how much input credit is due to you.
Speed
When you are designing a banking product, you need to reach out to the market quickly and take the first mover advantage. You can’t keep on designing a product forever. Speed in new product development allows the bank to take advantage of market opportunities as they present themselves.
To ensure speed in product development, an efficient set up of product innovation in the lender’s organization is also of paramount importance. The time taken in studying the market, developing a product design, taking sign off from relevant verticals, refining the design based on their inputs, and taking the product to approval committee – all this needs to be done in a time bound manner if a lender really wants to launch a product before its competitor does.
Positioning
Careful positioning of a new product often pre-determines its success. Chris Nichols, Chief Strategy Officer at CentreState Bank, Florida says that the product positioning strategy involves identifying your target customer base, assessing the most important features for those customers, selecting a product that delivers those features, and finally effectively differentiating the product from your competitors’ products. This goes well for MSME lending too.
Return expectation
It is important to factor in what returns we are expecting from a product. The return expectation can be guided by diverse considerations. For example, when banks are struggling to raise cheaper funds or fighting to contain operational costs, a margin higher than existing products could be a natural consideration. On the other hand, in a crisis situation when you have to quickly respond to a national need like Covid-19, return expectation may take a back seat and merely breaking even could be good enough, more so in case of public sector banks or financial institutions.
Risk containment
Every product has a unique set of risks. A product designer has to find ways to manage these risks. For example, when we were designing a loan product in collaboration with a hotel aggregator, we came to know that the hotel owners had to bring their property to specified standards, for which they needed loan for renovation. The renovation took 8 to 12 months, during which no rental was paid to owners. There payment to lender was to come from these rentals only, which meant that we were not covered during this period.
Another problem was servicing of interest during the renovation period when no revenue was being generated. We had to find ways to contain these risks without resorting to collateral. A suitable risk mitigating structure was created and the product was finally approved. It is another matter that the product could never be launched due toCovid-19as the occupancies went down substantially.
Operational ease
No product is complete without the operational processes attached to it. If we want a turnaround time of 3 days, we can’t have an application form of 12 pages or an assessment note spanning 40 pages. While releasing a product, therefore, the product designer needs to give a careful look to the associated operational processes and make sure that these are attuned to the expected turnaround time and delivery needs.
Scalability
If a new product is well designed but not scalable, probably there would be no point in going ahead with its launch. True, sometimes new products are also launched to test the market. But the primary motive of a lender is usually to come out with scalable products which could bring in volumes and achieve portfolio growth. Scalability is therefore a key parameter in product design.
Marketing plan
In MSME lending, it is not necessary to spend a fortune on print media advertising of new products, although print media does help. Yet, there are other more efficient ways to supplement the publicity efforts. Vivek Malhotra, Head of SIDBI’s Direct Credit Vertical insists that a detailed and cost effective marketing plan should be in place before we launch any new product. This could be in the form of creating and emailing one-pagers and professionally designed flyers to industry associations, sending standard mailers to existing customers, creating standard tweet texts, sending out social media messages, developing a Facebook page, introducing website pop-ups, having a dedicated calling line, etc. – all these are economical ways to support marketing of a new product and enhance customer outreach.
Delinquency
However best bankers try, non-performing loans will never be zero. Given the imperfections associated with MSME lending, delinquencies are bound to happen. Every product must account for possible delinquencies. The product design determines what delinquency estimates can be taken as acceptable. The designer should do a careful risk profiling to make sure that the probability of default (PD) falls within the acceptable range. More precisely, a designer has to look at the PD table and build appropriate filters in the product design to control delinquencies. If the PD estimates go beyond acceptable limits, the designer would do well to drop the product.
Expected Loss
As per Risk Management theory in banking, Expected Loss is defined as a product of Exposure at Default, Probability of Default and Loss Given Default. The basic thumb rule in product design is : net earnings from a product should not fall below the expected loss estimates, otherwise the product is not considered viable. Usually 3 strategies (or a combination thereof) are deployed to minimise expected losses: (i)getting collateral, so that when an account goes bad, you can recover your money (ii) keeping high filters, so that you can control the delinquencies, and (iii) getting a guarantee cover, which can improve your Loss Given Default, so that expected losses are minimised. However, actual design of a product may require a deeper understanding of the associated risks and careful use of an appropriate strategy.
Competitor’s products
A well-designed product for MSMEs may still not attract clients if its features are not an improvement over the competition. On the other hand, during research phase of product development, while going through a competitor’s product, a designer may suddenly realize that he has resources to offer better features to the same target group.
When SIDBI launched a green product for financing solar roof tops, everything looked good. But the product was still not selling. Feedback revealed that another lender had come out with better product features. When we aligned our product with the market, also adding our own improvements, the product picked up.
All this may sound theoretical, but by employing these tactics and considerations, SIDBI created a huge impact in the market with certain products. Of the growth in direct MSME lending achieved by SIDBI in FY 2020, more than 70% came from new products. New customers added grew by 46% over previous year. Overall customer base grew by 27%. New products enhanced the Bank’s image as a faster and more responsive institution than before. More importantly, the customers loved the experience, which was among the primary motives.
Also Read : UK to invest $1.2 billion in green energy projects in India
Also Read : Converting Corona Crisis in to opportunity for resilience, humane dignity and hope
The new products also brought better returns than existing products the XIRR was significantly higher. The most noticeable factor was there were no non-performing loans. Going forward, some loans may still go bad because a lot of small businesses have been severely impacted by Covid-19, but a continued low NPA level over a longer term despite Covid may validate the product designs and the underwriting strategy in the most convincing way. SIDBI’s experience and pioneering role in serving the MSMEs through innovative quick delivery products may pave the way for other lenders in maximizing their MSME portfolio.
(The Author is former General Manager of SIDBI, His e-mail is apsriv@gmail.com)
