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Making the MSME Sector Bankable Lack of formal financial history, lengthy processing and unavailability of timely access to funds from the formal sector have forced the MSMEs to seek credit from informal sources at significantly higher interest rates

By Paroma Chatterjee

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The MSME sector has rightly been acknowledged as India's "engine of growth'. In India, this sector has gone from strength to strength, clocking an average growth rate of 11.93 per cent last year. In financial year 2018, MSMEs accounted for 30 per cent of India's gross domestic product, 45 per cent of total manufacturing output, and 40 per cent of the country's exports while also providing employment opportunities for over 106 million individuals. Despite its contribution to the economy, one of the major bottlenecks this sector faces is the lack of access to enough and timely credit. Estimates show that India's MSME finance potential is close to $370 billion, while actual credit supply is at a mere $139 billion.

Lack of formal financial history, lengthy processing and unavailability of timely access to funds from the formal sector have forced the MSMEs to seek credit from informal sources at significantly higher interest rates. With India aiming to become a $5-trillion economy by 2025, and MSMEs being a critical contributor to this growth, it becomes imperative that the financial gaps hindering their progress be tackled.

Digitization and its Role in MSME Empowerment and Growth

The MSME segment is undergoing transformation in terms of formalization and digitization. With an ever-growing smartphone base and increasing digital penetration, MSMEs too have adapted to the advancements in tech and digitization. With mobile Internet, information flow has become seamless and the reliance on digital data is now more than ever.

Online registration and tax reporting have further created a large pool of digital data from the MSMEs; data that is verified and accessible electronically. Driving this digital evolution forward is "India Stack', a set of APIs that connect different servers and devices, enabling instant communication. Along with other additional APIs, India Stack has become a rich reserve of both public and private data.

Online availability of data that can aid credit decision-making has been boosted by the launch of Unified Payments Interface and Goods and Service Tax. These two have created a massive data trove and opened a plethora of opportunities for fintech players, especially digital lenders to address the current MSME credit gap. Availability of digital data allows faster and more efficient processing of loan applications at a much lower cost and lesser risk.

Growing Digital Impact

This era of digitization has disrupted the way financial services operate. Ease of access to digital technologies has boosted acceptance of online as a channel for financial transactions among MSMEs. As a result of increase in online transactions, fintech companies offering digital wallets, payments, insurance and more importantly, digital lending to MSMEs, have benefited tremendously.

Digital lending solves what has been a major challenge among the MSMEs: easy and timely access to credit. By catering to a requirement that has long impeded their growth, digital lenders are championing the cause of MSMEs.

Unlike banks and traditional financial institutions, digital lenders have kept pace with the need of MSMEs. They have understood the recurring, and at times immediate, nature of capital requirement. Right from the digital origination to online assessment, digital lenders are easing the processes for MSMEs. Digital lenders have identified different ways of evaluating creditworthiness of any individual or business. Increase in availability of digital data has simplified the process of collection of various types of financial information and documentation.

This has also alleviated the need for paperwork which has been a huge deterrent for MSMEs taking working capital loans. Post assessment, validation and disbursals have also moved online. Online terms closure, e-NACH and the likes, have also helped close the loop and digitized the entire process.

Overcoming Language Barriers to Improve Last Mile

Though digitization has helped MSMEs transform tremendously, literacy is still a stumbling block. Digital lenders have understood this challenge and overcome it by offering their products in multiple Indian languages.

From making the app and Web page accessible in the local language, to being able to give call center support in a preferred language, digital lenders have been innovating to connect better with customers. These customizations have helped digital lenders reach a larger number of MSMEs across different geographical locations, further aiding wider financial inclusion.

Giving MSMEs the Power of Choice and Access

Through innovations in digital lending today, MSME lending is focused around empowering the sector with easy access to credit. Digital lenders are enabling the MSME community not just by giving them easy and timely access to funds, but also empowering them to build a good credit score. Now, MSMEs without a financial history can also build a credit score for themselves.

Digital lending companies are becoming the lender of choice for these businesses because taking a loan from them not only provides them with timely access to credit, but also helps build or improve their credit score. This enables them to be approached by banks and other financial institutions which might have rejected them earlier, thus giving them a choice they did not have before. This has significantly contributed towards growing financial inclusion of MSMEs into the mainline.

Paroma Chatterjee

Chief business officer, Lendingkart

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