Re-imagining Indian MSME Lending — Technology led digital transformation

Published in

FinTech 2030

6 min readJun 9, 2021

“Imagination creates reality.” ―Richard Wagner

In today’s day and age, data is the cornerstone of any digital transformation. The government is working hard to ensure economic advancement and accelerate economic growth and so they launched India’s Digital India Initiative. The way people transact, and access money, digitally has changed dramatically over the last few years. This rapid shift to digital transactions has benefited business payments, particularly in the MSMEs. Previously, the problem of restricted entrepreneurship was entrenched in outstanding dues and past due payments because of deferred authorizations on paper checks, verification on cash payments, and other factors. Payments have become timelier because of digitalization, and banks have been more willing to lend to small and micro businesses. Digitalizing banks, sanctioning pre-approved personal loans, and financing MSMEs have all boosted the sector significantly, and the initiative’s widespread effect can be seen in sectors such as construction, automotive, transports and logistics, and others. The benefits of digitizing India from a cash-centric to a cashless economy on MSMEs lending have increased transaction tempo and created each payment a part of the economic mainstream, ramping up business credibility and guaranteeing transaction safety and confidentiality.

**Figure 1: Key sectors attracting MSMEs loans**

Technology has revolutionized the banking sector and identifying critical issues can help MSMEs bridge the shortfall. MSMEs’ lending can be viewed from three different point of views:

What are digital financial products and how can they help small businesses get funding?
MSMEs’ digitalization and how it might increase productivity, lower operating costs, and thus maximize profits?
Impact of e-commerce and open banking as market enablers?

Impact of COVID-19 — Doomsday or a redemption opportunity for MSMEs?

Enterprises all over the world have been affected by the pandemic. Micro and small businesses earnings have been impacted by 20%-50% mainly due to liquidity crunch. The major source of credit has been NBFCs and MFIs. What has exacerbated the situation is that the NBFCs itself have been struggling with liquidity crunch since September 2018 which directly dried up the credit sources. Nevertheless, post-crisis usage for AI, ML and Data Science enabled creditors is forecast to expand, as tech-based financial institutions move to digital-only interactions. Being able to systematize and optimize these actionable insights will assist leaders in navigating and sustaining today’s turbulence, as well as emerging triumphant with smarter insights to reap the benefits of the long-term transformations that are unavoidable. The unprecedented event like global health pandemic always brings up a question in mind, that what could be done to forestall the blow of such events which may occur in near future.

**Figure 2: Tech led upgrades in the value chain of MSMEs**

The four main types of upgradation in MSMEs value chains that shall be observed in near future are as follows:

Chain upgrades shall enable MSMEs to leverage into production networks with overall value addition.
Through technological enablement, functional upgrades shall facilitate MSMEs to transition from low-value-added business operations to higher-value-added activities.
Product upgrades shall include improved technological prowess as well as increased production efficiency improvements for elevated products.
Process upgrades shall enable better and more inventive manufacturing techniques, leading to more effective transformation of raw materials into finished products and, as a result, increased efficiency, and performance.

MSMEs could even gain from such an upgrade incentive if it is available in their nation. Technology advancement is critical for MSMEs’ economic expansion. By utilizing sustainable development practices pertinent to their commercial activities, digital banking can assist MSMEs to accelerate the development of a potential model.

Key Indian Examples

SMEcorner is a new generation FinTech lender that provides collateral-free business loans in 24 hours to SMEs in India.
Lendingkart, an Ahmedabad-based FinTech start-up, offers special MSME and SME loans to businesses seeking quick financing in the country. Such loans are authorized online, which helps to expedite the delivery of financial vehicles.
CRED is the biggest example of disruptive fintech firms in India.

Global examples of FIs, FinTechs & MSMEs partnerships

The US Treasury has given global players such as PayPal, Square, Kabbage, and Funding Circle permission to offer small business loans through the US Small Business Administration’s Pay-check Protection Program.
In Canada, the Business Development Bank of Canada offers online small business loans up to a certain amount with a 48-hour turn-around time.
GlobalLinker, is providing practical advice to MSMEs in the U.S. on how to set up their own e-store and how to develop a digital strategy for the future.

Way Forward for FIs & FinTechs

The use of big data analytics may help to eliminate informational asymmetries and provide additional data for analyzing MSMEs’ financial risk. Emerging technologies and improved service system integration will make money management, customer relationship management, and supply chain management tools more affordable to these businesses. Digital Financial Services (DFS) will be critical in empowering unstructured businesses to enlist the formal economy. DFS shall also assist females-owned SMEs in improving their capacity to make corporate investment and gain profits to manage their business. DFS will reduce administrative and disbursement costs for financial products and increase traceability.

Governments across the globe are mobilizing a series of measures to assist SMEs in surviving the COVID-19 crisis, such as direct grants to enterprises, equity infusion, and debt financing techniques such as financial inclusion schemes, subsidized loans with deferred repayments, low-to-no-interest loans, and collateral free loans and so on. Banks could use simpler loan application procedures and hasten approval rates thereby decreasing MSMEs loan timeframes. Furthermore, banks could use digital platforms to undertake reverse factoring transactions, facilitating stockpile funding to MSMEs and reducing the sophistication of the business transactions associated.

Advantage India

Two vital forces will work together to create niches, new products, and elevate bank lending in the MSMEs sector:

Formalization — The number of entities registered, documented, and certified is constantly rising. From 22 lakh registered MSMEs in 2015 to 88 lakhs today, a trend that is speeding up with facilitating government procedures and a fixate on Ease of Doing Business.
Data democratization — The growing formalization and rapid adoption of the India Payments stack has provided us with exposure to a range of quasi data sources for financing. Each day, new financing models based on alternative datasets are evaluated and enhanced, offering the means to introduce an even greater number of MSMEs into the structured credit system.

With India’s bond markets coming to fruition, encouraging MSMEs’ bond disbursements can help MSMEs participate in debt markets. Although such bond issues will provide MSMEs with lower rates than most other money markets, they could also be a sustainable high-yield tool for a well-trained and intelligent bond market investment firms. Labor laws, as they currently stand, are not amenable to MSMEs growth. They must strike the proper focus on providing an economic expansion framework for MSMEs to operate in and providing adequate protection for workers’ rights. Finally, while Ease of Doing Business has been emphasized, the reporting, approval, and regulatory compliance for smaller firms remain onerous. With intense competition at the global level and the demands arising from globalization, it is now imperative to re-imagine the collaboration between lenders and Indian MSMEs to demonstrate greater competitiveness to position themselves strategically and leverage the growth opportunity for better engagement in global value chains.

Can’t wait to see what lies ahead, a banking transformation or a technology disruption or both?