Fintechs and digital lenders should play a major role in addressing the unmet credit demand in the MSME sector
Highlighting the significant achievements of the Narendra Modi government, Union Finance Minister Nirmala Sitaraman, in her Interim Budget-2024 speech, said that one of the top priorities of the government is to ensure timely and adequate finances, relevant technologies, and appropriate training for MSMEs to enhance their global competitiveness.
The FM highlighted that, in the past 10 years, the government distributed Rs 22.5 lakh crore through 43-crore PM Mudra loans. Close to 30-crore Mudra loans were given exclusively to women. Still, the credit demand from the sector is huge and the problems in identifying eligible borrowers remain unresolved.
A major hurdle in the path of MSME growth is the unavailability of institutional credit at the right cost and at the right time. Though the Centre has deployed numerous financing schemes to provide credit to micro entrepreneurs, the real problem lies in assessing creditworthiness. The MSME sector is one of the key pillars of the economy that contributes around 30% to the GDP and employs 11.1 crore people.
Currently, the MSME sector is facing acute financial stress as it is evident in the sector’s slow pace of post-pandemic recovery. This is primarily due to the lack of long-term, affordable credit. The credit gap is estimated to be close to Rs 33 lakh crore, according to the latest report by 1Lattice. Another report by Avendus Capital highlights that the credit gap is more than Rs 40 lakh crore.
The funding sources of the MSMEs include government agencies like SIDBI and NABARD, regional rural banks, commercial banks, co-operative banks and NBFCs. According to TransUnion CIBIL August 2023 report, India has 6.3 crore MSME units of which only 2.5 crore have ever availed credit from the formal sector. A major reason for this is the limitation of conventional lending tools that often fail to evaluate the real potential of loan applicants. MSMEs rely heavily on unorganized players for emergency funding as the conventional lenders insist on meeting the requirements of credit score/history, audited reports, tax papers and bank details. As a result, the micro enterprises will look elsewhere for easy money, mostly at exorbitant interest rates.
However, it appears that the utilisation of government funds and institutional credit has become more efficient post-pandemic due to the enhanced use of digital tools by both lenders and borrowers. The Emergency Credit Line Guarantee Scheme (ECLGS), which was introduced during the post-pandemic period, has been a success as all the stakeholders used digital channels, partially or fully, to avail of the facility. Guarantees amounting to Rs 3.61 lakh crore have been issued under the scheme till January 2023 and, in this, the MSMEs availed Rs 2.39 lakh crore.
ED & CEO
Indel Money
Another significant shift post- pandemic is that commercial banks have started employing digital partners for loan origination and distribution, while the MSMEs have started using digital ways to streamline their operations. Digital lenders are transforming the conventional lending space by introducing new assessment models using artificial intelligence (AI) and machine learning (ML). Such tools help them assess the borrowers at various levels since they have a deep digital presence and access to multiple sources of information, including social media platforms.
Easy access to affordable credit is the lifeline of the MSMEs, which will energise them to scale up, go for technology upgrade, and improve their productivity. The sector’s revamp is essential for the country to become the third-largest economy by 2030. It can only be achieved in this short period by making the government schemes, funds and affordable finance available for eligible borrowers through the digital lending channels.
