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Micro, Small, and Medium Enterprises (MSMEs) industry has been a formidable force behind India’s growth during the past decade, thanks to the sector’s near 30% contribution to GDP and emergence as the second largest employer after agriculture. In sync with its consistent growth, the credit ecosystem, the bedrock of MSMEs, has also undergone a significant transformation.
Initially, the MSME credit space operated within traditional banking systems, limiting accessibility and burdening MSMEs with challenges in securing financing due to stringent eligibility criteria and a lack of collateral. The ecosystem relied heavily on paperwork and lengthy approval procedures, making it difficult for smaller enterprises to navigate. Limited financial histories and inadequate documentation further worsened the problems faced by MSMEs. Although they play a crucial role in the economy, only a small portion of MSMEs had access to credit, resulting in a substantial credit gap estimated at approximately INR 45 lakh crore in India alone. However, digital technologies are continuously redefining the way these MSMEs borrow money.
Tech innovations: Catalysts of change
Digital lending in India is rapidly expanding. Digital disbursements in India have shown significant growth, with 49% increase in FY24 by value. The emergence of digital lending platforms and innovative lending models has certainly revolutionized the MSME credit landscape. These platforms leverage technology to streamline the lending process, offering quick approvals and flexible terms. Data-driven credit analysis has enabled lenders to assess creditworthiness based on alternative data points, empowering even those MSMEs with limited financial histories to access financing. Furthermore, tailored loan products designed to meet the different needs of small businesses have emerged, catering to specific industry requirements and cash flow dynamics. Such innovations have made it easier for small businesses to access credit. For Eg: NeoGrowth offers a daily repayment model which is in alignment with the daily cash flows of retail businesses.
Technology-driven lending has empowered MSMEs to take a giant leap in transforming their businesses.
From embracing digital payment systems to adopting accounting software etc., MSMEs are leveraging technology to streamline operations, enhance productivity, and foster innovation. In a recent NeoGrowth NeoInsight report titled ‘Decoding Digital Payments:
A Retailers Perspective’ 90% Retailers said that they pay their suppliers and distributors digitally. Harnessing digital platforms helps them to expand into new markets, form strategic partnerships, and sustainably scale their businesses. In essence, technology serves as the cornerstone for MSMEs, empowering them to adapt, compete, and thrive in an increasingly digital world. This fosters a new era of business possibilities and economic development.
Positive impact
MSMEs are vital to India’s economy, generating employment opportunities for over 110 million people and driving innovation. Access to credit empowers these small businesses to hire skilled workers, invest in offering new product and services, and expand their operations, thereby contributing to job creation and economic prosperity. It’s akin to providing them with a boost, enabling them to accomplish even more positive outcomes for everyone.
Future opportunities
The future of MSME lending holds significant promise for further innovation. As technology evolves, opportunities to streamline the loan acquisition process for MSMEs continue to grow. Artificial Intelligence (AI) and Machine Learning (ML) algorithms can refine credit scoring models, enabling more accurate risk assessment and personalized loan offerings.
Instead of relying solely on basic information like credit history and assets, AI and ML can delve deeper, analyzing vast amounts of data to uncover patterns and insights. This capability allows lenders to make more informed decisions about loan approvals and amounts. Additionally, these technologies enable lenders to tailor loan options to fit each MSME’s unique situation. For instance, by analyzing a company’s cash flow, customer behavior, and industry trends in real-time, lenders can identify opportunities and risks more quickly. This allows for the provision of loans that better match the needs and capacities of each MSME.
Government Support
MSMEs are increasingly digitizing themselves, spurred by government-led initiatives such as Digital India, GST, and UPI. With the help of API-based data availability, MSME lending is rapidly moving towards end-to-end digital lending, with loan approval times as short as a day. The use of Digital Public Infrastructure (DPIs) such as e-KYC, Aadhaar, DigiLocker, and PAN eSign has also transformed the digital lending process.
Conclusion
The future holds great potential. The past decade has witnessed a paradigm shift in the MSME credit ecosystem, driven by innovation and technological progress. As MSMEs continue to evolve and adapt to changing market dynamics, embracing technology-led innovation will be key to unlocking their full potential and driving economic growth.
