In India, the micro, small and medium enterprise sector plays a crucial role in the country’s economy. Almost 50 million such enterprises operate in various industries across India, employing over 100 million people. More than half of them are based in rural areas, while over 7 percent of entrepreneurs are women. In all, the sector accounts for a substantial 37 percent of India’s GDP and over 40 percent of its exports. However, lack of adequate and timely access to finance has remained the sector’s biggest challenge, constraining its growth.
Importantly, India’s small enterprises have not been able to use their moveable assets – machinery, stocks, receivables or livestock - to access working capital loans, despite these assets being accepted as collateral internationally. These moveable assets account for over 80 percent of the asset base of India’s small enterprises – a pattern similar to other developing countries.
Now an International Finance Corporation (IFC) supported project – called India Collateral - has helped make it easier for India’s MSMEs to use their movable assets to borrow from financial institutions. As a result of this initiative, earlier this year, the Indian government introduced a new rule permitting lenders to register their moveable assets as collateral.
Today, India’s financial institutions can secure their lending by registering their security interests on a borrower’s movable collateral with a central database - the Central Registry of Securitisation Asset Reconstruction and Security Interest (CERSAI).
Increasing lenders’ confidence
In China, a similar effort has led to a quantum jump in lending to small and medium enterprises. In 2004, the World Bank Group estimated that China’s private firms, SMEs and farmers owned more than $ 2 trillion of assets that could not be used to generate loans. After 2008, the situation began to change when the People’s Bank of China, with World Bank Group assistance, established a registry for the moveable assets of small enterprises. It stands testament to the enormous need for such a registry that by the end of 2015 the number of such registrations in China reached almost 2 million, facilitating financing to the tune of some $ 10.4 trillion.
“In India too, this new initiative will increase lenders’ confidence and help a large number of small businesses get quicker access to credit,” said Niraj Verma, manager in the World Bank Group’s Finance and Markets Global Practice.
Already, the three-month pilot phase has resulted in 120,000 registrations, demonstrating the initiative’s immense potential. Further expansion of the registry’s scope will help in facilitating over $ 5 billion in financing to Indian MSME’s over next 3-4 years.
Facilitating the process in India
IFC has been working with CERSAI since 2012 to strengthen its business model and expand its scope to cover all types of security interests - and better align with international best practices[1].
CERSAI, established in 2011 to register transactions on immovable property, records all registrations of charges on collaterals extended by borrowers to lenders. Currently over 670 member banks and non-banking finance companies register their secured interest on mortgages with approximately 12 million records.
The laws for the creation, registration and enforcement of security interests were reviewed and changes suggested by a group of banking and legal experts. The group consisted of representatives from the Reserve Bank of India, the country’s central bank, other leading banking and financial institutions, as well as from the World Bank Group.
IFC’s India Collateral project is now focused on developing and implementing a comprehensive stakeholder engagement plan, which includes training financial institutions on movable-asset based lending, as well as on increasing the usage of the CERSAI platform.
The World Bank Group, which believes in creating opportunity where it is needed the most, works with governments and various stakeholders in India and globally, to facilitate business and also increase access to finance for underserved segments.
[1] International best practices can be found here:
Secured Transactions Systems & Collateral Registries Toolkit
UNCITRAL Legislative Guide on Secured Transactions
World Bank Groups’ Principles for Effective Insolvency and Creditor/Debtor Regimes
