MSMEs are key contributors to the country’s economic activity as an important source of employment, growth, and innovation. Despite their essential role, MSMEs receive a disproportionately small share of credit from the financial system, a trend that persists across developed and developing countries. The International Finance Corporation (IFC) estimates that 65 million firms, or 40% of formal micro, small and medium enterprises (MSMEs) in developing countries, have an unmet financing need of UDS 5,200 billion every year, which is equivalent to 1.4 times the current level of the global MSME lending.
In India, a greater number of MSMEs tend to be informal in nature, have limited publicly available information, and are relatively less aware of the bank requirements, all of which result in higher information asymmetries impeding bank lending to the sector. As per an RBI report, the total commercial lending exposure in India stood at USD 919.06 billion as of June’20 of which the MSME segment holds only 25.27% of the total lending amounting to USD 232 billion of credit exposure. Moreover, the estimated debt requirement for Indian MSMEs points to a colossal credit gap of over USD 219 billion, outstripping the available supply of finance from the formal sector.
Over the past few years, the MSME lending landscape has seen a major shift. Despite the relatively small share in the lending space, the sector has witnessed an increased credit flow in the commercial lending space showing YOY growth of 22.7% (September 2018-September 2019). Historically dominated by Public Sector Banks and traditional lending processes, the market has witnessed the entry of new innovative alternative lending platforms, private banks, and NBFCs in recent times. Notably, NBFCs, which are fairly new entrants have gained share constantly to stand at 12.8% in September 2019.
The MSME lending landscape is also undergoing a paradigm shift. Increasing digital footprint and online transactions even in remote locations of the country have opened up the market. The improved access to high-quality data from multiple credible sources such as Goods and Services Tax Network (GSTN), which currently has a registered base of more than 9.2 million MSMEs regularly filing monthly returns, will further improve access. Coupled with the emergence of innovative lending platforms, smaller enterprises with no financial records or credit history are now finally getting some form of formal credit.
Although relatively nascent, NBFCs powered by
are paving a hassle-free route to efficient and customized credit products for MSMEs. The use of new-age technologies and digital tools such as AI, machine learning, and data analytics is helping this high-potential, high-value space to grow and drive greater financial inclusion across the country.
However, given the proportion of the problem around lack of finance, it is clear no single solution can bridge the gap and create an enabling environment. Therefore, to address the perceptible credit gap, there is a need to introduce and adopt new financing models. Alternative financing tools, such as equity finance, peer to peer lending, TReDS, etc. have a lot of potential to grow. Further, an approach can be piloted which acts as an integration layer on top of multiple systems. Most MSME data sources and digital infrastructure that exist have APIs that can be pulled into a lean layer. This can allow better visibility of the MSME from program design, application and verification, benefit flow and monitoring perspective.
With the COVID 19 pandemic disrupting economic activities worldwide, the role of fintech, banks, and NBFCs in powering small businesses in the post-pandemic new world will go way beyond routine financing. Adoption of innovative lending models will not only forge the right balance for financial stability but also encourage a focus on the credit needs of small businesses in the country and NBFCs and fintechs may be considered as better equipped to support this endeavour. The continued evolution of the MSME lending landscape can be another step towards achieving the vision of Aatmanirbhar Bharat.
The author is Partner, Infrastructure, Government and Healthcare, KPMG In India. Views are personal.
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