How Cloud-based technology can help banks reduce rising NPAs

Shashank Dixit, CEO, Deskera (Pic)
Shashank Dixit, CEO, Deskera (Pic)

“Today, an enterprise is granted loan and the bank has no control over how it uses the money. For instance, if an enterprise takes loan for payroll through the Deskera product then the money can only be used towards paying the payroll. Therefore by deploying our cloud-based solution, banks can ensure the use of proceeds for the intended purpose,” says Shashank Dixit, CEO, Deskera. In an interaction with EC’s Ankush Kumar, Dixit stressed on the potential that the SMEs have in terms of adopting innovative technologies and the challenges they face when it comes to affordability.

Edited Excerpts:

How is Cloud ERP market growing in India? Why do you consider SMEs as a key consumer segment?

Manufacturing industry vertical is the major contributor to the cloud ERP market in India. The ‘Make in India’ initiative by the Indian government is a big boost to this sector. It contributes nearly 24.1 percent to the total cloud ERP market in India. In addition, most of the cloud ERP in manufacturing vertical is driven by the growth of SMEs and adoption of cloud ERP by them. The Cloud ERP market is a high growth market but big players are unable to approach this market. As our is an Indian brand therefore we are the constituents of the Make in India initiative. We know the requirements of our clients and are firmly present in the SME segment. We also think that SMEs are largely underrepresented. Technology providers are not giving SMEs access to technology at a price that the SMEs can afford. On the other hand, Deskera is extending a hand towards SMEs. We represent SMEs. We have a strong voice which we will use to represent SMEs and we will channel their needs to bigger authorities in India to help them.

How do you see the competition in the Indian market as some of the global players are already very active in this region?

Big players are unable to close this market because SMEs don’t trust them. There is a trust deficit. How can the SME trust someone who doesn’t even speak the local language? This is where Deskera can capitalize the market as we know our customers inside out. In line with the Indian Government’s vision to boost the SME sector, we help these enterprises run their businesses on an integrated Cloud-based platform, thus enhancing productivity and moving one more step in the direction of the Government’s ‘Make in India’ mission. We have been doing our own bit in transforming our nation into a Digital India.

How do you think technology can help banks in getting their NPA’s in check?

India is facing its worst ever financial crisis since 1991. Bad loans grew to Rs 3,41,641 crore in September 2015, and as a percentage of the total loans, went from 2.11 to 5.08 percent. Big corporates account for the Lion’s share of the NPAs, whereas small and medium enterprises have kept up with their financial commitments. For this we need to understand the bigger picture.

There are two major reasons due to which banks are suffering from bad loans. Firstly, an SME is an unknown entity for a bank; it doesn’t know an SME in terms of who its customers are or how many employees are there on its payroll. Typically, in the Western world, the payroll information is a critical piece of the whole puzzle. If banks have visibility into how many actual employees SMEs have, they can make a fair assessment of the enterprise. It is also a very good measure of how good or big a company is. Deskera can play a crucial role by providing information through its ERP and payroll module. The second factor is the use of proceeds.

Today, an enterprise is granted loan and the bank has no control over how it uses the money. For instance, the SME can use it for some other purpose like buying a car. Typically, banks have little control over the use of proceeds. By using a Deskera product, banks can ensure the use of proceeds for the intended purpose. Consequently, if an enterprise takes loan for payroll through the Deskera product then the money can only be used towards paying the payroll. For example, if a bank gives Rs One crore for payroll, the money will only get disbursed to salary accounts. This is similar to a home loan or car loan. If you take such loans the money does not come to your account, it is disbursed to home loan account. Therefore, this money cannot be diverted.

However, in case of SME loan, this check is absent and hence there is a chance that the money may be diverted to some other purpose. To reduce that risk one has to ensure the use of proceeds. But that cannot be done without a structured system like Deskera since the loan requirement can be for two or three different things such as vendor payment, payroll, purchase, etc. In such a scenario banks can pay directly to the concerned accounts. Concluding, we can say that there are two ways in which banks can reduce bad loans: controlling the use of proceeds and getting access to the SME’s data.

What role can companies like Deskera play in helping banks minimize their NPAs and assist SMEs get easy loans?

Deskera’s Cloud-based ERP keeps track of the key financial transactions of an enterprise: invoices, inventory, account receivables, balance sheet, etc. It keeps a record of business resources—cash, raw material, production capacity—and the status of business commitments: orders, purchase orders, and payroll. If this data is made available to the banks, they will be in a better position to take informed decisions. On the basis of the data, they can predict when and how an enterprise will start losing traction, weeding out wilful defaulters. Banks can monitor the finances of an enterprise in real time if they are red-flagged.

SMEs generally need short-term loans to tide over. Our system can assist in a big way in this aspect. By frequently giving away such loans, banks will also be able to assess the financial profile and creditworthiness of an enterprise. On the other hand, after an SME has been showing financial discipline and settling its debts on time, its credit profile would improve over a period of time, encouraging banks to extend the credit limits. A typical example is that if somebody has to meet the payroll requirement next month, they get a loan today. SMEs can get a loan and return easily. But this is not the case.

Banks in India are incentivized to give as much loan as possible. And it’s easier for banks if they give the loans in big chunks. So, banks would rather give it to one guy than to four other guys because it is means less headache, although data shows that it is better to give Rs One crore each to 400 people than giving away the Rs 400 crore to one person as compliance rates are high. On the contrary, the system today is incentivized to give as much loan to as few people as possible. While in reality it should be the reverse that is giving away as little to as many people as possible. In the worst case scenario you would at least get back Rs 300 crore as compared to one single loan defaulter with Rs 400 crore. SMEs, anyway, have a greater incentive to return loans as it is their bread and butter. The other point is that SMEs don’t even have the clout to leave the country.

How do you think the entire process of loan sanctioning and accountability can be made transparent? Can’t we use such application and software which can simplify the entire process?

By using Cloud-based technology the process of loan allocation will become transparent. It would be also be helpful for SMEs as they would get all the requirements of a bank in one application, thus making it easy for an SME to apply for a loan. By ensuring the use of an ERP like Deskera by an enterprise, banks can get data from SMEs, making it transparent from both sides. SMEs are already applying for easy loans from banks through Deskera in South East Asia market. We want to bring this technology to India and we are in talks for tie-ups with a couple of banks.

Singapore-headquartered and provider of enterprise software segment in the South-East Asia region, Deskera, has also announced to invest S$50 million over the next three years to build a wholly owned Cloud data center in Singapore. The Cloud-based business software provider plans to convert the data center into one of the biggest software as a service (SaaS) centers in South-East Asia.