BEND A LITTLE AND SPEND A LITTLE MORE TIME | EXPAND MSME TO EVERY UNTAPPED SEGMENTS | GLOBAL TV
NV Paulose, Chairman, Global TV +91 98441 82044
The Micro, Small, and Medium Enterprises (MSME) sector has long been the backbone of the economy, contributing significantly to employment, innovation, and GDP growth. We can leap into the economic landscape by introducing the MSME Models in any sector like Media, particularly in Social Media and in Non-Periodical Print Media. Despite its critical importance and huge potential MSMEs are still kept in isolation with one another.
This is the major reason for MSMEs continue to face significant challenges in accessing financial support, market linkages, and other essential resources. The question arises: can banking bend a little to unlock the true potential of MSMEs?
A Case for Change in Banking Practices
For decades, traditional banking has adhered to a risk-averse model, prioritizing collateral-based lending and stringent eligibility criteria. While this approach ensures financial stability for banks, it excludes a vast segment of MSMEs that lack tangible assets or formal credit histories.
In today’s digital and interconnected world, it is imperative for banks to evolve their practices and embrace flexibility. Doing so would not only benefit MSMEs but also catalyze economic growth on a broader scale.
Banks should move from the ‘Bankers Interest’ Mindset to the ‘Facilitators Commission’ Mindset!
What does this mean? Imagine a person approaching the bank for a loan to procure infrastructure and tools to create a facility to conduct a shooting for TV episodes and Non-periodical Publications. Bank is asked to give a loan of ₹10, 00,000/-. One bank takes it as an individual case and offers a loan at 10% Interest. Another Bank takes it as an opportunity in line with the principle of the 100th Monkey phenomenon. It is a popular concept that stems from studies about how new behavioural patterns are born in societies.
What Is the 100th Monkey Concept?
The concept originates from a story about Japanese researchers in the 1950s who studied macaque monkeys on the island of Koshima. The story goes that one monkey learned to wash sweet potatoes before eating them, and this behaviour gradually spread through imitation to other monkeys in the group. Once a critical mass (e.g., the “100th monkey”) adopted the behaviour, it allegedly spread instantaneously and mysteriously to monkeys on other islands.
The 100th Monkey phenomenon has become a metaphor for the idea that when a critical mass of people adopt an idea, behaviour, or innovation, it creates a tipping point where the behaviour spreads rapidly and widely. Collective consciousness and shared wisdom lead to spontaneous and simultaneous changes across groups.
Hence the second Bank captures the idea and understands there is a potential for One Million such loans in the country. They open negotiations with companies that can provide the facilities with better qualities at a cost of ₹8,00, 000/- each also with a commission of 10% and an advance cash payment incentive of 2%.
The Bank offers the loan for 6% Interest giving 3 years’ time to repay the loan with a down payment of ₹2,00, 000/-.
Let’s break this down and calculate the financial aspects based on the information provided.
Scenario
- Loan amount: ₹10,00,000 (as requested by the individual for infrastructure and tools to conduct a shooting).
- Bank 1: Offers loan at 10% interest (traditional interest-based mindset).
- Bank 2: Moves to a commission mindset, negotiating with suppliers for better pricing and terms, offering loans at 6% interest with a down payment of ₹2,00,000. It also includes supplier commissions.
Bank 1: Interest-Based Loan at 10%
Loan Details:
- Loan amount: ₹10,00,000
- Interest rate: 10% per annum
- Repayment period: 3 years
This gives an EMI of ₹32,267.
Total Repayment:
- Total paid over 36 months = 32,267×36=₹11,61,61232
- Total interest paid = ₹11,61,612−₹10,00,000=₹1,61,612
Bank 2: Commission-Based Loan at 6%
Loan Details:
- Negotiated cost: ₹8,00,000
- Commission for bank: 10% of ₹8,00,000 = ₹80,000
- Advance cash payment incentive for supplier: 2% of ₹8,00,000 = ₹16,000
- Total upfront payment from the bank to the supplier: ₹8,00,000 – ₹80,000 – ₹16,000 = ₹7,04,000
- Down payment by the borrower: ₹2,00,000
- Loan amount financed by the bank: ₹6,00,000
- Interest rate: 6% per annum
- Repayment period: 3 years
EMI Calculation:
Using the same EMI formula:
This gives an EMI of ₹18,297.
Total Repayment:
- Total paid over 36 months = ₹18,297×36=₹6,58,
- Total interest paid = ₹6,58,692−₹6,00,000=₹58,692
Comparison of Scenarios
| Aspect | Bank 1 (Interest Mindset) | Bank 2 (Commission Mindset) |
| Loan Amount | ₹10,00,000 | ₹6,00,000 |
| Interest Rate | 10% | 6% |
| Total Interest Paid | ₹1,61,612 | ₹58,692 |
| Total Repayment (3 years) | ₹11,61,612 | ₹6,58,692 |
| Down Payment by Borrower | None | ₹2,00,000 |
| Negotiated Infrastructure Cost | Not applicable | ₹8,00,000 |
| Commission Earned by Bank | None | ₹80,000 |
| Supplier Incentive | None | ₹16,000 |
Key Takeaways
- Cost Efficiency: Bank 2 reduces the infrastructure cost by negotiating and passes some of the savings to the borrower.
- Borrower Benefits: The borrower pays less overall with lower interest rates and a smaller principal amount to repay.
- Bank Revenue: Bank 2 generates commission revenue while offering better loan terms, creating a win-win scenario.
- Scalability: If the bank can implement this model across 1 million such loans, it opens up enormous economic potential and reinforces the 100th Monkey concept by encouraging similar ventures nationwide.
Bank 2’s innovative model leverages multiple revenue streams to maximize returns while maintaining a lower interest burden on the borrower. With a loan amount of ₹6,00,000, the bank generates a total income of ₹1,54,692, comprising ₹58,692 from interest and an additional ₹96,000 from commission and supplier incentives. This represents a return of 25.78% on the loan amount, significantly higher than the 16.16% return achieved by Bank 1.
Additionally, Bank 2 secures a down payment of ₹2,00,000 from the borrower upfront, ensuring immediate liquidity and reducing the risk on the loan. The ₹80,000 commission and ₹16,000 supplier incentive further add to the bank’s revenue, received alongside the down payment, enabling Bank 2 to generate substantial income even before the loan repayment begins. This model not only enhances profitability but also creates a win-win situation by lowering the borrower’s overall repayment burden.
This model not only benefits the individual borrower but also demonstrates the potential for scalability. If the bank replicates this approach across one million such loans nationwide, it could revolutionize the lending landscape. By moving from an interest-driven mindset to a commission-driven approach, banks can unlock economic opportunities, encourage entrepreneurial ventures, and create a ripple effect of financial growth and innovation. The 100th Monkey phenomenon underpins this approach, showing how a small behavioural shift at scale can lead to widespread economic transformation.
Reducing the actual loan exposure
In the case of Bank 2, the ₹96,000 (₹80,000 commission + ₹16,000 supplier incentive) is earned at the very beginning of the transaction, effectively reducing the actual loan exposure to ₹5,04,000 (₹6,00,000 loan – ₹96,000 upfront earnings). This creates a significant additional advantage for the bank:
Lower Risk Exposure: With only ₹5,04,000 at actual risk instead of ₹6,00,000, the bank minimizes its financial exposure while still earning interest on the full loan amount.
Enhanced Effective Return: The ₹58,692 interest earned over three years on the reduced risk of ₹5, 04,000 translates to an effective return of 11.64% on the actual exposure. Combined with the upfront ₹96,000, the total return on the actual exposure rises substantially, making the model even more profitable.
Improved Liquidity: The ₹96,000 earned upfront can be reinvested or used for operational purposes, boosting the bank’s liquidity and enabling it to fund more loans or generate additional revenue streams.
Sustainable Revenue Model: Expanding income sources through commissions and supplier incentives, the bank achieves profitability without heavily relying on interest payments. Create a sustainable and borrower-friendly revenue model.
In essence, Bank 2’s approach not only improves profitability but also reduces risk and enhances cash flow, making it a more efficient and advantageous model.
Be Alert! The 100th Monkey Phenomenon Keeps Happening in the World
The 100th Monkey phenomenon is a striking metaphor for how collective consciousness can drive rapid societal transformations. In every field, from technology to culture, there comes a moment when resistance gives way to widespread adoption. Take, for instance, the arrival of computers. Initially met with skepticism and fear of redundancy, computers have now become indispensable across industries. Similarly, tractors revolutionized agriculture, yet they were once resisted by farmers who feared they would disrupt traditional practices. These examples serve as reminders that resisting change only delays progress. The world keeps evolving, and when a tipping point is reached, even the most resistant forces must align with the flow of transformation.
Micro Global TV, as introduced by Global TV, exemplifies the emergence of a modern phenomenon destined to gain traction worldwide. This innovative concept envisions a new wave of “Resident Editors” and “Managers” who will facilitate local and global communication, enabling communities to access real-time information and opportunities. The initiative aims to harness the intellectual potential of just 0.1% of the population to act as enablers for the rest, showcasing how a small but influential group can drive significant change. As more people recognize the value of this model, the tipping point will soon arrive, leading to its widespread adoption. Just like the 100th monkey’s act of washing sweet potatoes created a ripple effect, so too will the Micro Global TV concept inspire a new era of decentralized, empowered communication.
India’s rapid progress in education and awareness underscores the need for institutions like banks to embrace these shifts. The metaphor of elephants being tied in cattle sheds is apt—restricting immense potential in outdated systems is both unsustainable and counterproductive. Banks, as facilitators of growth, must shift from a “Bankers Interest” mindset to a “Facilitators Commission” mindset, recognizing opportunities beyond conventional paradigms. By aligning themselves with transformative concepts like Micro Global TV, they can not only support innovation but also position themselves at the forefront of societal change, ensuring they move ahead with the inevitable flow of progress.
Reimagining Banking for MSMEs
Here are ways in which the banking sector can “bend a little” to better serve MSMEs:
1. Move Beyond Collateral-Based Lending
MSMEs often operate with limited physical assets, making collateral-based lending a significant barrier. Instead, banks can adopt credit scoring models powered by data analytics, which assess repayment capacity based on cash flow, and business performance. Banks can monitor the transactions as well. Recall the introduction of PoS Machines where the Branch Manager were reluctant to take it up saying a hundred reasons. They could not understand the 100th Monkey concept as it was emerging and sweeping the way cash was removed from transactions.
2. Micro-lending through Digital Platforms
By leveraging technology, banks can directly disburse small and microloans to MSMEs through digital platforms. This eliminates the need for intermediaries, reduces costs, and makes the loan approval process quicker and more efficient.
3. Personalized Financial Products
MSMEs operate in diverse sectors, each with its unique challenges. Banks can develop sector-specific financial products tailored to the needs of different industries, such as flexible repayment schedules for seasonal businesses or working capital loans for exporters.
4. Financial Literacy Programs
Many MSMEs lack formal knowledge of financial management. By investing in financial literacy programs, banks can empower MSMEs to make better financial decisions, ultimately reducing default rates.
5. Collaborative Ecosystems
Banks can partner with Professional training establishments like the Indian Society for NLP (ISNLP) to create ecosystems that provide training and mentorship for the people engaged in MSMEs along with financial support.
The Role of Digitization in Bridging the Gap
The advent of digital technologies offers a transformative opportunity for banks to serve MSMEs more effectively. Here’s how digitization can be a game-changer:
- Real-Time Risk Assessment: AI-powered tools can evaluate creditworthiness in real time, considering non-traditional data points like transaction history and customer feedback.
- Streamlined Loan Processing: Digital platforms can drastically reduce the time and paperwork involved in loan approvals.
- Increased Outreach: Mobile banking and online platforms can extend financial services to MSMEs in remote and rural areas, promoting financial inclusion.
The Need for an External Ecosystem
While banks can and should adapt, the broader MSME ecosystem also requires strengthening. This calls for the creation of an external management, facilitation, and mentoring system that complements banking services. Such a system would provide MSMEs with:
- Training and Capacity Building: Enhancing skills in areas like digital marketing, financial management, and compliance.
- Innovation Support: Facilitating research, development, and incubation for MSMEs to innovate and compete globally.
- Market Linkages: Connecting MSMEs with larger enterprises, government projects, and export markets.
What’s in It for Banks?
For banks, bending a little isn’t just about altruism; it’s also good business. MSMEs represent a massive untapped market, and serving this sector can lead to:
- Diversified Revenue Streams: Expanding into micro-lending and MSME financing can provide banks with new revenue sources.
- Stronger Customer Relationships: Offering tailored services fosters loyalty and long-term partnerships with MSMEs.
- Contribution to Economic Growth: Supporting MSMEs strengthens the economy, creating a virtuous cycle of prosperity that benefits everyone, including banks.
The time is ripe for the banking sector to step up and take bold, innovative steps to support MSMEs. Bending a little and adopting flexible lending practices, leveraging technology, and collaborating with stakeholders; banks can empower MSMEs to thrive in an increasingly competitive world.
The question is no longer “Can banks afford to bend?” Instead, it’s “Can the economy afford for banks not to?”
The answer lies in action. It’s time for banks, policymakers, and industry leaders to come together and reimagine the future of MSME. Support MSMEs because when MSMEs grow, the nation prospers.
