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Bank of the Future

GST – A win-win for banks and SMEs?

 
December 15, 2016

The implementation of GST is believed to make the operations of small and medium enterprises (SMEs) more transparent, thus facilitating growth. This will help them seek loans more easily from banks, which wasnt possible earlier due to the lack of reliable information for credit assessment and limited collateral to offer as security, among other reasons.

GST, which is expected to become effective by April 1, 2017, aims to replace 16 types of taxes with a single tax. Under the proposed tax regime, companies can claim input tax credits on supply of goods or services after submitting tax invoices. This not only ensures transparent business operations, but also acts as an incentive for SMEs to maintain proper records of their sales and purchases. Such record-keeping is useful to banks when they perform credit assessment as they can cross-verify financial statements provided by an SME with actual tax data available from the GST Network (GSTN).

Under the GST regime, buyers of goods will get the benefit of input tax credits of taxes which have already been paid by their suppliers. This creates a virtuous cycle, where buyers insist on proper invoices, as well as ensure taxes have been paid by their suppliers, to get tax credits. As a result, there is greater tax compliance in the entire value chain. SMEs that comply with tax obligations will become attractive as suppliers to larger companies, and also are likely to accumulate a trail of transactions. This will make them better candidates to seek loans from banks.

While SMEs might face some initial implementation hurdles with regard to the GST bill, it will benefit them eventually, since there will be transparency in administrative work. Additionally, when the GST is fully implemented, the retail value of the imported goods will be linked with the GSTN, eliminating fraudulent business. For example, SMEs that import goods at a declared price, cannot sell products at higher prices without being flagged.

When banks have the visibility into business operations and cash flows based on the tax invoices and paper trails (bills, book of sales, tax returns and other documented proof) of the supply chain, aided by the GSTN, banks can stop relying on excess collateral to mitigate the risks in lending to SMEs. This in turn will enable SMEs to use the collateral to further invest in their businesses, in order to scale new heights.

Further, due to the implementation of GST, banks will be able to approve loans considering the cash flows instead of collateral.

GST to boost e-commerce trading

SMEs that sell their products on e-commerce platforms like Amazon and Flipkart are taxed differently by tax authorities in different states. As a result, the efficiency of the supply chain on which the e-commerce industry thrives on, takes a hit. With the proposed tax regime, the e-commerce industry will be freed from numerous, complicated tax levies. The industry will be able to focus on reducing inventory and logistics costs. SMEs that sell on e-commerce portals will be able to grow their business significantly as they get seamless access to the nation-wide market. Banks have started funding such merchants through e-commerce portals. This trend is likely to grow as banks will get access to additional data on merchants through their GST returns.

Whats in store for banks?

The potential of the SME market is immense, with the volume expected to grow to $3 trillion in 10 years. Banks are making all-out efforts to increase their SME book value. Some banks have started attractive lending schemes for e-commerce players. In addition to SMEs balance sheets and income tax returns, banks can leverage analytics to examine SME information captured by the e-commerce platform based on product quality, reviews, shipment quality, delivery adherence, and so on. Using these alternative means, banks can provide an appropriate credit score to SMEs, and offer instant loans. This step will not only help SMEs get loans easily, but will help banks increase their share of the SME market too. What do you think?

Harish Kumar Dhilip Kumar is a Functional Consultant with the Banking and Financial Services (BFS) business unit at Tata Consultancy Services (TCS). He has more than eight years of experience with expertise in the commercial and consumer lending space. Harish has previously worked with leading multinational banks in the area of commercial lending, and has developed product offerings for EdgeVerves Finacle suite of financial solutions. He holds a Bachelors degree in Industrial Engineering from the University of Kerala, India.