Digital payments have revolutionized the financial landscape in India in recent years, propelled by a burgeoning fintech ecosystem and the government's push for financial inclusion. The recent NPCI data 1 reveals that there has been over a 200% increase in digital transactions in the last four years since FY 2018-2019.

UPI transactions also saw an eight-fold increase in the last three years, reaching 45 billion in FY 2022. 2 In February 2023, P2M UPI transactions witnessed a 119% growth during the same period. This adoption of UPI and other digital payment modes by India’s retailers is driven by demand from customers, who have shown increased stickiness towards easy-to-use safe online payment platforms since the pandemic.

For MSMEs, the benefits of digital transactions go beyond accepting and making payments. Digital Payments also offer a secure, streamlined, and convenient way for loan repayments, reducing administrative burden, and mitigating the risk of losing important records.

Digital transactions record of MSMEs is also helping to remove the inherent challenges of assessing their creditworthiness. The verifiable trail of digital financial transactions of MSMEs can be leveraged to understand the financial health of the MSME and its ability to repay loans by the flow of transactions, and consistency of payments. Thus, providing valuable insights into a borrower’s financial behaviour, enabling lenders to make more informed data-based lending decisions. This trend is helping bring previously underserved segments into the formal financial services ecosystem and driving financial inclusion.

Here are some ways in which digital payments make loan repayments simpler for MSME Borrowers.

1.Automated loan repayment mechanism::

Digital payments offer MSMEs access to automatic loan repayment mechanisms, which reduces the risk of missed payments, late payments, or defaults. Any default in loan repayments negatively impacts credit scores and makes it difficult to secure future loans. Digital payments-enabled loan repayment modules ensure that no instalment is missed by the borrower.

2.Streamlined payment for repayment obligations:

Sometimes, business owners have to visit physical payment centres to make their loan repayments, which is a time- consuming and costly exercise. Digital platforms, with a promise of streamlined and convenient payment, eliminate this, and the integrated payment gateways enable borrowers to make repayments using their phones or computers, from anywhere. This reduces the burden of manual loan repayment processes for MSMEs, allowing them to focus on their core business operations.

3.Increased financial inclusion and flexible cash flow management:

Flexibility in repayment options helps businesses with irregular cash flow patterns. With digital payments, MSMEs can repay loans daily, weekly, or on a fortnightly basis, depending on their business requirements. NeoGrowth, for example, offers a flexible repayment mechanism to its customers including daily repayments. This is a shift from traditional loan repayment models, which come with rigid repayment schedules and are not adaptable to changes in repayment patterns.

4.Enhanced security:

Digital payment platforms offer encrypted payment portals, ensuring transactions are secure and protected from online fraud or theft. It provides enhanced security features, offering peace of mind to business owners while making payments.

Digital Payments to Continue Enhancing MSME Credit:

The year 2023 will witness the inflection point of digital payments in India, with the government, lenders, and payment gateway vendors working towards strengthening the digital ecosystem to facilitate mass adoption and move towards a cashless economy. The accelerating P2M transaction via digital modes will only elevate India’s MSME Credit space in its entirety – right from assessing the creditworthiness of borrowers based on their digital transactions to simplifying loan repayments.

Disclaimer: While we have made every attempt to ensure that the information contained herein is obtained from reliable sources. The author assumes no responsibility or liability for any errors or omissions in the content of this blog/website. We do not make any warranties about the completeness, reliability, and accuracy of this information. Any action you take upon the information on this blog/website is strictly at your own risk, and we will not be liable for any losses and damages in connection with the use of our blog/website.