Privately Held But Publicly Available
Lenders and corporates alike can take more informed decisions on associating with private companies if they have access to quality data
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The MSME (Micro Small and Medium Enterprises) sector saw a host of interventions in the 2018 Union Budget, with the Finance Minister announcing measures on bank financing and Non-Performing Asset (NPA) resolution. These commendable initiatives will give the sector a much-needed shot in the arm, and the emphasis is warranted. After all, like the Mittlestand of Germany, MSMEs form the backbone of large stable economies. In India, they account for about 45% of GDP, providing 90% of overall employment in the organized sector, and 40% of exports.
However, lending to these smaller, unlisted/ privately held entities carries inherent risks for financial institutions, primarily because of the scarcity of credible, reliable information on them. A recent report by CARE Ratings ranked India at fifth on the list of countries with highest NPAs, taking the top spot amongst the BRICS nations. Only the troubled PIIGS countries - Portugal, Italy, Ireland, and Greece - have a higher NPA ratio. That NPA burden translates to over INR 7.33 lakh crore as of June 2017.
Among unlisted companies, there are about 1.8million privately-held companies, with overall paid up capital totaling $ 200 billion. While private companies present a big growth opportunity for the banks, they also form a major chunk of the NPAs which the Indian banks have been struggling with. In this case, the lack of adequate information about these companies certainly makes the loan approval process more vexed for financial institutions. This process becomes more critical in view of the ever-evolving regulatory situation, and increasingly stringent Know Your Customer (KYC) norms, which require detailed knowledge of the customer's overall business.
When assessing the viability of an assessee for a loan, it helps to weigh its performance against that of its industry peers. Apart from financial information, the decision is also influenced by the background of key personnel and the possibility of pending legal matters. Beyond financial institutions, this calculus also applies to other companies and potential partners considering a professional relationship with the privately-held assessee (perhaps as a service provider or vendor), who may wish to factor out reputational risk by association.
Enabling access to comprehensive private company data will help corporations grow their business, contain risk better and make more informed strategic decisions. Such information would be valuable across a range of sectors, including:
1. Investment Banking, Private Equity, Venture Capitalist & Family Offices
2. Banking: Treasury Sales / Corporate Banking, Risk teams (credit evaluation, Enhanced Due Diligence etc.)
3. Investment & Advisory: Credit Portfolio managers, Global / Local research desks
4. Corporate: Corporate strategy, Mergers & Acquisitions, Supply Chain teams
5. Government: Regulatory Departments; further use-cases to be defined
Much of this data is still patchy and incomplete, though the quality of data available is improving by the day. The Ministry of Corporate Affairs, the Registrar of Companies and credit-rating agencies together hold a valuable repository of data for potential partners to consult. The post-demonetization rise of recordable digital transactions and the advent of GST will further enrich the data that is available. However, data in the public domain can still take time to access, and may demand financial and human resources that a company or bank may not always be able to expend at a given moment, considering the size of the relationship.
The bold new initiatives in the Union Budget should open a world of opportunity for MSMEs. However, the multiplier effect of these opportunities will only begin to be felt when decision-makers feel confident that they have the data they need to make an informed decision, and a platform that assuages all their queries and concerns about privately held companies.
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