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Raising capital has been a challenging task for medium and small businesses in India and the last two years have been a reminder of the existing credit gap in India’s MSMEs sector. As per IFC estimates in 2021, the total addressable credit gap in the MSME segment is INR 25.8 trillion, growing at 37 percent CAGR. The total addressable market demand by the MSME sector is approximately INR 37 trillion, of which banks, other institutions, and NBFCs supply about INR 10.9 trillion.
While there was an expected dip in credit demand during the roughest years of the pandemic, the MSME sector is on its path to recovery, and some industry segments are crossing the pre-pandemic levels. As per the SIDBI-CIBIL Pulse report released earlier this month, the credit demand by MSMEs has been progressive after the second wave. Current credit demand is about 1.6x times the pre-COVID phase. Commercial credit inquiries have picked up in the last year owing to a recovery in economic and business activity.
Given this situation, FinTechs can step in and address the potential lending opportunities for the MSME sector.
Here are five ways in which they can help MSMEs resolve their credit problems:
1.Tailor-made products:
The technology and digital capabilities of FinTechs allow them to customize products that meet the cashflow requirements of the MSMEs and extend short-time, small ticket size loans. Such loan products are useful for MSMEs that require constant working capital for growth. FinTechs, with their digital capabilities, can ensure minimal documentation and quick turnaround time for MSME borrowers. FinTechs can offer unique features to their customers such as daily repayment models, which further make availing credit simpler for them.
2.Innovative lending models:
The integration of digital and analytics is also enabling FinTechs with new-age lending models. This can help address the financing needs of MSMEs or industry segments that have been traditionally excluded from the formal financial system due to challenges such as lack of documentation, or credit history.
3.Paperless and contactless lending:
A successful FinTech lender’s business is based on the principles of being paperless, contactless, cashless, and transparent. This is possible by adopting the right technology and keeping it simple for MSME borrowers. For example, FinTechs are facilitating seamless customer onboarding by using digital-based identification systems already in place, such as GSTN, Aadhaar, UPI, DigiLocker, and other tools, for a quick and hassle-free documentation process, including e-KYC or video-based KYC. The adoption of the Account Aggregator framework will further speed up the paperless journey and reduce the price of lending for MSMEs.
4.Assistance to businesses without credit history:
Historically, lack of credit history has been a major challenge for MSMEs while applying for loans. To boost financial inclusion, regulatory bodies have been encouraging FinTech lenders to extend various financial services to MSMEs with a relatively low ticket size and little or no credit history. FinTechs use behaviour patterns and analytics to drive formal credit and help such businesses opt out of the informal lending system. Cashflow-based lending is enabling the advancement of loans to MSMEs by analyzing real-time cashflow data in the absence of credit history.
5.Colending partnerships:
With Co-lending now a part of the financial ecosystem, the bank-fintech partnerships will help these financial institutions to collaborate and leverage their respective strengths to provide first- and last-mile services to medium and small businesses.
Interestingly, when MSMEs avail loans from FinTech lenders and showcase disciplined and responsible repayment behavior, they automatically build a healthy credit score that eventually helps them raise higher capital in the future.
The rising digital payments adoption by small merchants is paving the way for the successful adoption of digital payments-based lending. Technology advancements in the digital services ecosystem such as Account Aggregator and OCEN are further bolstering MSME lending. With existing and upcoming digital innovations in the lending space, India’s nearly 8-million-strong MSME sector will continue to be the key driver of the economic and social transition from India@75 to India@100.
