THE IMPLEMENTATION of the Goods and Services Tax (GST) in July 2017 has been a watershed event, reshaping the way businesses, especially small and medium enterprises, operate and access credit in India. An analysis by Fortune India Research shows that introduction of the new tax regime has enabled an increase in credit offtake to micro, small, and medium enterprises (MSMEs) even as overall credit growth took a sharp knock.

For instance, credit growth pre-GST (FY11 to FY17) clocked a CAGR of 8.92% from ₹16.05 lakh crore to ₹26.80 lakh crore, post-GST (FY18 to 9MFY24), the growth plummeted to 5.23% from ₹26.99 lakh crore to ₹36.65 lakh crore. The sharp deceleration can be attributed to the slowdown in private capex, the impact of the pandemic and the subsequent deleveraging of balance sheets by large corporates. As a result, the robust CAGR of 8.92% in the pre-GST era fell to 5.23% in post GST.

In contrast, credit growth to emerging enterprises that had shrunk (-1.75%) pre-GST from ₹1.16 lakh crore to ₹1.05 lakh crore in FY17, saw the highest jump — a CAGR of 18.73% — post GST. In the case of micro and small firms over the same time periods, the CAGR moved up only marginally from 9.87% to 11.17%.

Before the advent of GST, there was a complex mosaic of state-specific tax regimes, including value-added tax (VAT), sales tax, and various forms of commercial taxes. These were filed physically, creating a fragmented and opaque system that made it challenging for financial institutions to assess creditworthiness accurately. “Pre-GST, every state had its own tax regime... the data could never be corroborated,” says Rajiv Chawla, who runs a ₹100 crore auto component business under the JaiRaj Group and is also the founder of IamSMEofIndia Association, which has over 3,000 members.

The introduction of GST marked a seismic shift towards transparency and digitisation. By amalgamating multiple taxes into a single framework and digitising the entire process, GST has enabled real-time access to data on sales and transactions. This visibility has been particularly advantageous for medium-sized companies, which have witnessed a significant uptick in credit offtake post GST. The cumulative outstanding of the country’s top six banks to MSMEs stood at ₹10.57 lakh crore, as of December 2023. Registrations for Udyam, also known as the MSME registration certificate, has accelerated from 1.31 crore in 2022 with an additional 88.89 lakh registrations in 2023, taking the total number of registrations to 2.19 crore. Further to bring informal micro enterprises (IMEs) into the formal ambit, the ministry, in association with Small Industries Development Bank of India (Sidbi), launched a portal, Udyam Assist Platform (UAP), last year, helping 1.11 crore IMEs onboard the UAP.

Moreover, the digital footprint of GST transactions has empowered fintech companies and banks to leverage artificial intelligence for swift loan processing at a relatively faster pace. For instance, Jocata, a Billdesk subsidiary, assists banks in analysing and assessing the creditworthiness of their MSME clients using its proprietary artificial intelligence and machine learning-based risk and business intelligence scores. Jocata asserts that its SME DNA technology has enabled one of India’s leading private banks to amass an MSME loan portfolio exceeding $1.4 billion in under a year, as of December 2023. Jocata Sumpoorn, tailored for MSMEs, is a high-frequency indicator developed from consent-based and anonymised sales data of over 50,000 MSMEs seeking loans from financial institutions. This data sample is geographically diverse and covers a wide range of turnovers and sectors.

“We have the capability to scrutinise the sales ledgers of MSMEs — a task that traditionally could have required 5-10 individuals up to three to four months to analyse. Now, with a simple click and an OTP-based consent from the business owner, we can decode the sales ledger in mere seconds,” Prashant Muddu, MD and CEO, Jocata Financial Advisory Services, had told Fortune India in an earlier interaction.

The journey has, however, not been equally smooth for all. Micro and small enterprises, often operating with thinner digital trails and lower turnovers, face hurdles in demonstrating their creditworthiness. While GST has facilitated easier credit for many, these smaller entities sometimes struggle to match the evidentiary standards set by financial institutions. “For those not covered in GST... it becomes even more time-consuming,” a small business owner shared, highlighting the challenges of accessing credit without a robust GST footprint.

Despite these challenges, the overall impact of GST on the credit landscape has been undeniably positive. It has democratised access to finance, enabling more businesses to thrive and expand. Public and private sector banks now offer competitive rates to GST-registered companies, reflecting a broader confidence in their financial health. “The best MSME rates today are from 8.75% to 11%,” mentions Chawla.

But what’s pertinent to note is that besides availability of granular sales data, what could also be driving credit is the government’s Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) that offers guarantee (75-85%) on loans up to ₹2 crore, without third-party guarantee and collateral. The corpus of the fund, introduced in 2000, is contributed by the Centre and Sidbi in the ratio of 4:1, respectively. The guarantee runs for the agreed tenure of a term credit or 5 years from the start date when working capital is provided. From ₹56,172 crore in FY22, the sum of guarantees approved has increased by 86% to ₹1.04 lakh crore in FY23 and has already crossed ₹1 lakh crore in the seven months of FY24.

The acceleration of credit in FY24 coincides with an overall slowdown in sales for the MSME universe as captured by the Jocata Sumpoorn index, which moved in the 0.53-0.62 band in 2023 against 0.56-0.73 in 2022. According to Jocata’s principal economist, Sumita Kale, and principal advisor, Narasimhan V., the slowdown mirror’s India’s growth trajectory as per the first advance estimates of national income, where the nominal gross value added came off the high growth of 15.4% in FY23 to 8% in FY24 and growth in nominal GDP moved down from 16.1% to 8.9%. The slowdown in real private consumption expenditure from 7.5% in FY23 to 4.4% in FY24 is of particular concern as curtailed demand impacts the MSME sector’s sales performance, mentioned the experts.

According to Jocata, 12.2% of the December 2023 pool of Sumpoorn GSTINs posed a strong risk of credit default. It would be interesting to see if the previous NPA cycle was on account of big corporates, will it be MSMEs that will emerge as a source of pain (besides retail, that is) for banks in the event of a painful downturn?

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