By Aditya Damani
Micro, small and medium enterprises (MSME) play a key role in India’s industrial production and the sector contributes nearly 30% to the country’s gross domestic product (GDP). They account for around 40% of India’s exports and employ 11.10 crore people, according to the 2022-23 annual report of the MSME ministry. The sector’s contribution to the service sector is not fully accounted for yet. Though the sector is contributing substantially to the country’s manufacturing output, it is the most scattered and unorganized among all industries. This heterogeneous character stands as a major hurdle in its path to expansion, modernisation and technological advancements.
The demand for credit from the MSME sector is surging year after year. The latest report from Avendus Capital estimates that the credit gap in the sector is close to Rs 42 lakh crore. The report highlights that India has over 6.40 crore MSME units and only 14% of them have access to institutional credit compared to more than 30% in the developed economies. Of the total credit demand, only Rs 23 lakh crore is met by formal credit sources like public sector banks, private banks and NBFCs. So, there is a huge credit gap of $530 billion (Rs 42.4 lakh crore), which provides a major opportunity for organized lenders.
Despite having taken various measures by the Centre to address this funding gap by introducing the Mudra Yojana, Emergency Credit Line Guarantee Scheme, Credit Guarantee Fund Trust for Micro and Small Enterprises, and India Stack (especially Jan Dhan-Aadhaar-Mobile), the sector’s hunger for capital remains unsatiated. Even a conservative estimate, like the one prepared by the UK Sinha Committee, highlights a Rs 25-lakh-crore credit gap in the sector. It appears that, along with the country’s robust economic growth, the MSME sector’s demand for institutional credit is also booming. Other factors that drive the credit demand, in a post-pandemic scenario, are the sector’s urge for capacity expansion, modernization, clean energy adoption and increased working capital needs.
It is noteworthy that the conventional banking system is unable to handle this rising volume of business from the sector. As a result, SME lending still remains a hugely underserved market. But it also throws open an opportunity for fintech companies to scale up banking and financial services business in the sector.
Fintech players have made banking services digitally accessible to unbanked and underserved communities. Unlike traditional lenders, they are increasingly using digital tools to assess the creditworthiness of MSMEs and process loan requests. Integrating digital tools like artificial intelligence, machine learning and data analytics in the lending process has helped fintech players gain traction in the largely unorganized SME market. Thus, fintech firms, with innovative technologies, are playing a crucial role in bringing people and businesses together to the formal banking network.
According to the EY’s Fintech Adoption Index 2019 report, India’s fintech adoption is one of the highest in the world. A major reason for this is the country’s burgeoning mobile-internet subscribers. JAM trinity, digital public goods infrastructure (Open Network for Digital Commerce, Open Credit Enablement Network, UPI etc.) and India Stack are also aiding the growth and expansion of fintech operations. Increasing digital footprint and fintech’s ability to capture financial transaction data even from the remotest areas of the country have made sourcing customer data easier. Such digital trails will help bring more MSMEs to the radar of fintech players.
Also read: SIDBI, GAME onboards first cohort of small NBFCs to accelerator programme NGAP
India has the third-largest fintech ecosystem in the world. According to E&Y’s India Fintech Report 2022, India is fast becoming the fintech hub for the world, with an estimated market opportunity of $1.3 trillion by 2025. In the past two decades, fintech companies have helped achieve more financial inclusion goals than those led by formal banking players in the past 70 years in the country.
Notably, a major headwind for the sector is the global slowdown. A slump in India’s export markets such as the US and EU will hit the export-oriented MSMEs. An analysis by Crisil shows that one in every five MSMEs will experience working capital problems due to this bearish sentiment. To overcome this situation, the government is trying to infuse liquidity through SIDBI and other institutions into small NBFCs and fintechs that are focused on MSME lending. Co-lending arrangements between NBFCs and banks are also on the rise, which will further enhance credit growth. Such measures are effective in improving money flow to the sector.
However, given the complexity of the sector and the enormous demand for funding, fintech players have a task cut out for them. At the same time, it’s a wide-open field where fintech and digital lenders, with their cutting-edge technologies, can make impressive strides by facilitating improved credit flow to the system.
Aditya Damani is the Founder & CEO of Credit Fair. Views expressed are personal.