Credit and finance for MSMEs: The role of traditional lenders such as banks in enabling India’s MSME ecosystem has been significant though the credit-raising process hasn’t been smooth. The fault lines aren’t only in the banking system but also in the MSME sector due to the sheer lack of awareness about the right process of raising credit and also because of the inconsistency and accuracy in maintaining books. As a result, a significant share of MSMEs in India continues to rely on informal sources of finance including money lenders, friends and family etc. According to the World Bank, out of some 58 million MSMEs in India, more than 40 per cent lack access to formal sources of finance.
“While they (MSMEs) might have a bank account but they haven’t been able to access a loan,” said Anil Bhardwaj, Secretary General at MSME body Federation of Indian Micro and Small & Medium Enterprises (FISME).
Addressing a panel discussion at the SME Artha event organised by FEASPIRE recently on the role of fintechs in helping MSMEs raise timely credit, Bhardwaj cited lack of assets among prime reasons for poor credit access by a large number of first-time entrepreneurs. “It is more severe for women entrepreneurs as in a patriarchal society the assets are usually in the name of father, husband, and brother. Hence, this is the best opportunity for fintech companies to come forward and lend to MSMEs because fintechs don’t rely much on physical collateral,” he said.
In comparison to banks, digital lenders offer comparatively small ticket loans, from a few lakhs to around Rs 5 crore or more, through apps or online platforms. They also don’t require a specific bank account while the underwriting requirements are lower and the process is significantly quicker than banks. Some of the players in the MSME lending space are Indifi Technologies, Flexiloans, U GRO Capital, and more.
“MSMEs need marketing access and finance to grow. While marketplaces such as Flipkart and Amazon are addressing the market access need, we are trying to solve the finance part in a collateral-agnostic way by use of data,” said Siddharth Mahanot, Co-founder and COO, Indifi Technologies in his remarks at the panel discussion.
According to Mahanot, the reason why MSMEs don’t get credit access easily is that it is not cheap to use the traditional method of underwriting for lenders in loans of Rs 2 lakh or Rs 3 lakh. In the case of such small ticket loans, “use of technology becomes important in order to bring down the cost of giving a loan of even Rs 50,000 and also do it profitably. The focus is to make giving loans data and technology-oriented for easy access to MSMEs.”
Indifi disburses loans to MSMEs within 24 hours based on KYC and bank statements while in terms of operating cost, it is half to one-third of what traditional MSME lenders would have, said Mahanot. “The interest rate for MSME loans via Indifi ranges from 16 per cent to 26 per cent.”
Importantly, in tapping into the vast market of MSME lending in the country, online lenders compete with informal players more instead of banks. “The competition we have is not from banks and NBFCs, it is the money lender, family and friends, and chit funds. We aim to open the market for MSMEs to get in the formal credit economy and eventually move to banks and bigger NBFCs (for higher credit),” said Manish Lunia, Co-founder at MSME-focused digital NBFC Flexiloans.com. The company plans to disburse more than Rs 500 crore in loans by end of 2022.
Over the past few years and particularly post-Covid, the government has launched a number of credit-related schemes for MSMEs. While a number of MSMEs have been able to benefit from them, there is still a large chunk of enterprises bereft of them. The challenge is also in discovering the right scheme for a particular business and understanding its eligibility.
Mumbai-based Ajva Fintech, which provides customised services in the field of taxation, compliance and financial planning from a single integrated platform to businesses, aims to solve this challenge through an aggregation model.
“We have developed an eMSME Saarthi platform having data of around 500 different schemes codified. MSMEs need to input their credentials like business location, industry type, etc., and the platform gives a list of schemes applicable to the business. It is more like a discovery platform for schemes rather than going to different websites to find out the relevant schemes,” said Vikesh Agrawal, CEO and Founder, Ajva Fintech. Based on the applicable schemes, MSMEs can engage with experts to help them avail the schemes.
This also solves for high cost and time required by banks in lending to MSMEs. “Because of the high cost of underwriting or maintenance, banks are not able to service the entire MSME sector. The platform has the eligibility test criteria (for applicable schemes) and basic underwriting criteria based on data input by MSME. It underwrites the company and the result becomes like a ready loan proposal for a bank or fintech. Hence, reducing the time and cost for lenders in lending to MSMEs.”
Importantly, the potential for MSME lending would be around Rs 3 trillion next year based on GST Invoices and bank statements made available on account aggregator (framework by the Reserve Bank of India) and banks adopting OCEN (Open Credit Enablement Network), said V. Anantha Nageswaran, the Chief Economic Advisor to the Government of India at an event recently. According to data platform Statista, digital lending is one of the fastest-growing fintech segments in India growing exponentially from $9 billion in 2012 to nearly $110 billion dollars in 2019. The digital lending market is likely to reach a value of $350 billion dollars by 2023 on the back of fintechs and non-banking financial companies (NBFC).