Micro, Small and Medium Enterprises (MSMEs) form an integral part of the Indian economy as they are known to foster innovation and growth. They are especially tied to the rural economy with more than half of the MSMEs existing in rural India, which makes their development crucial for balanced growth of the country. As per its Annual Report for the year 2020-21, the Ministry of Micro, Small and Medium Enterprises estimates that approximately 51% MSMEs are in rural areas of India.
Despite their significant presence, they have traditionally been facing inequitable distribution of resources. The second wave of the pandemic hit MSMEs worse than the first wave did. MSMEs were still reeling with the impact of the first wave and were gradually recovering, but the second wave brought about even more disruption for them.
The disparity became glaringly obvious during the pandemic. The need to address it should now be a priority, starting with solving the issue of formal credit being largely inaccessible to MSMEs, hindering their growth.
Lalit Mehta, Co-founder & CEO, Decimal Technologies, said, “MSMEs are often overlooked when it comes to access to formal credit. These credit inaccessibility issues can be addressed with digital lending and the technology now available that enables more inclusive lending.”
One of the reasons for the lack of formal credit available to MSMEs is their inability to fit into the conventional parameters of creditworthiness that require assets to offer as collateral, a good CIBIL score or audited financial statements. According to Lalit Mehta, alternative data is the answer to this.
“Use of alternative data in the underwriting processes is key in expanding the definition of ‘creditworthy’ beyond affluent borrowers. Alternative data will allow fintechs to assess everyday behaviours such as timely payment of utility bills, periodic business expenses and more to determine an MSME’s creditworthiness,” he said.
Digital loan providers should also understand the unpredictable nature of MSMEs that are mostly in the informal segments of the economy and offer flexible solutions. Technology-driven lending can enable provision of varying ticket sizes of loans depending on the end-user’s needs such as quarterly farming loans linked to harvests or daily loans for vendors. Fintechs can simplify the usually complex and opaque loan processes to make them more user-friendly for the less financially-literate MSMEs.
Mehta commented, “Digital lending and alternative data will enable financial institutions to customise their loan products for specific MSME demands while also accelerating the usually lengthy loan disbursal process.”
“There is definitely a demand for safe and agile credit disbursal processes and digital offerings from smaller towns as we witnessed this trend during the fiscal year 2020-21. MSMEs were one of the major takers for loans disbursed via our AI-enabled No-Code platform. Given this demonstrated need for accessible formal credit, we believe it’s crucial to expand the credit reach to the traditionally underbanked MSMEs via partner banks and Direct Selling Agents.”
The unmet credit demand of India’s MSME sector is estimated to be approximately $200 billion. Hence, there is considerable potential to explore digitalisation in lending that enables onboarding small-ticket borrowers at reduced costs with provisions of lower interest rates. Fintechs and financial institutions will play a crucial role in bridging the credit gap as MSMEs prepare for more uncertain months ahead before turning onto a path of recovery.