MSME Lending Landscape In India
The GDP of the Indian Economy as per FY 20 is approximately Rs 210 Trillion, with the MSME sector contributing close to 15% of it and is projected to account for 50% of the working population of the country. Having said that there is a huge demand for credit from the sector ( est. INR 70 Trillion ) and currently only 16% of this demand is being addressed by the formal sources such as the banks and the NBFCs.This basically means either the remaining demand of close to INR 59 Trillion goes unaddressed or a part of it is being catered by the informal sources like moneylenders, chitty companies etc.
A major reason why a good chunk of this demand doesn’t turn to the formal sectors like Banks and NBFCs is because of the stringent checks and policies they operate under; which is not the case with most of the players operating in the informal segment and the small business turn to them basically because of ease of getting the credit to run their business.
This is where the FinTechs come into picture, with most of them trying to bridge this Demand Supply Gap by easing the onboarding process, increasing the transparency in the process, reaching out to users in the remote parts where formal banking services have not penetrated while the telecom and mobile technology has, also providing the business an alternative to the informal sector where they end up paying exorbitant interests. Convenience and seamless experience have become the features of almost every new offering that comes in the market.
With changing scenarios on compliance and regulations the FinTechs face challenges of coming up with innovative ways to cater to the unaddressed credit demand from the MSME Sector.
“Credit Invisibility” of the customers is another major hurdle that the Fintechs try to cross by turning to various relevant data sets like the cash flow analysis, buying behavior, regularity in paying bills/ payables etc, which put together can be a good proxy for the creditworthiness of the customer who until now are ‘invisible’ to the traditional systems which mostly concentrate majorly on the credit history; thus trying to remove the ‘in’ from the invisible and making them visible to the credit industry. This opens up a whole lot of opportunities not just for the customers but also for other players in the ecosystem.
The current situation has also posed a lot of challenges as the demand remains predominantly unchanged while a steep shortfall from the supply sides as the lending forms are apprehensive about repayment and the loans turning to NPAs.
The moratoriums announced by the Govt. has only increased their skepticism on the same. The easing measures taken to infuse liquidity in the economy hasn’t really shown its effect in the short term but it is expected that it would definitely start surfacing in the medium term and help revive the credit scenario from the present situation.
The Pandemic has only made the scope of increase in the contribution by the MSME sector to the national GDP in the near future, with many migrant workers returning to their homes from major cities and planning to lead lives with their own small business.
This not just helps the penetration of businesses into uncharted areas but also the spread of awareness about better credit options available, since word of mouth is a very common means of marketing in the Tier III areas.
A seamless journey starting from on boarding to disbursing the loan to the account makes the business man’s life much easier, this allows them to focus more on what they are good at — ‘ Running their Businesses ‘.
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