By Harshvardhan Lunia
Credit and Finance for MSMEs: Freedom has many facets, but at its core lies in the availability and ability to exercise choice and experience independence. This thought lies at the basis of the need for an individual’s financial independence as well, for which we can take MSMEs as the perfect example. MSMEs form the backbone of our economy, making up almost 50 per cent of the products exported by India as reported by the India Brand Equity Foundation (IBEF). Additionally, over 65 million MSMEs in India provide employment to 110 million individuals, many of whom qualify as unskilled or semi-skilled. Many of these small businesses sustain the livelihood of not just individuals, but their families as well.
Every small grocery store, local tailor, and sweet shop make up this large part of our community. However, their path to sustaining and expanding their venture is often riddled with obstacles. Dreams and creative business ideas often lose their steam when they lack the appropriate building blocks for their business. Lack of family support, limited access to resources, confusing financial processes, and insufficient capital or assets are common problems faced by these entrepreneurs. The absence of financial mechanisms that are adapted to their needs restricts their independence, often forcing them to shut operations, function within a limited scale, or become dependent on informal or exploitative lenders.
Systemic issues have created a lending gap between suitable borrowers and lenders of around Rs 20-25 trillion or $267-334 billion. This massive number represents a loss for all stakeholders, with financial institutions missing out on eligible customers as well as borrowers not getting the required resources to flourish. Although each business comes with its unique story, common problems faced by MSME owners paint a picture of structural issues that inhibit their financial freedom.
The traditional collateral-backed loan process requires an individual or business to have assets in order to receive capital, visit a physical bank branch, and provide extensive financial data. For many individuals, and particularly MSMEs, who are unable to fulfil these requirements, the process is inherently exclusionary. The provision of a loan to a small business is beyond just profit for a lender, representing an expression of belief in the enterprise. It can also encourage business owners to grow and expand their enterprise, provide an opportunity to develop new skills, enable taking more risks, and scale up their operations. Obtaining these funds through regulated bodies in comparison to informal loan sharks also ensures that the borrower’s interests remain protected. This independence to make confident business decisions comes only from financial freedom.
At the beginning of 2022, India had 658 million internet users with a penetration rate of 47 per cent. This illustrates that despite a great disparity in resource distribution between urban and rural areas, digital access levels the playing field. Therefore, adapting tedious financial processes like obtaining loans to the digital platform forgoes physical barriers that often restrict small business owners. Whether a social media savvy entrepreneur in a Tier 1 city, or a small shop owner in Tier 2 or 3 towns, both can have equal access to capital when applying online.
Additionally, providing capital for SMEs provides an opportunity to support originality and innovation. This freedom to experiment and expand in a market can only be experienced with easy access to credit. Supporting an MSME today will provide an opportunity for people to stand up on their own feet, and make independent choices for their lifestyles. One generation’s success can result in improved quality of life, access to resources, and better education for the next. Although advancements in fintech have improved access to capital, awareness about these mechanisms is still limited. Improved penetration of government schemes and financing options will enable increased financial independence for small businesses.
Harshvardhan Lunia is the CEO & Founder at Lendingkart. Views expressed are the author’s own.