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Strengthening financing to the MSME sector – the here and now digital opportunity – ET BFSI


It is a well-established fact that micro, small, and medium enterprises (MSME) as a sector has been the proverbial backbone of the Indian economy. Contributing almost 30 percent of the country’s GDP, 45 percent of the manufacturing output and 40 percent of the exports1, the sector is estimated to have generated employment for over 11 crore Indians2. There are about 63.3 million MSMEs2 in India and the significant financing gap in the sector is also well documented. For instance, data from the Reserve Bank of India shows that of the total gross industrial credit deployed by banks in the past eight years, credit to MSMEs contributed only 22 percent3. A much cited study by IFC estimates the overall credit gap in the Indian MSME sector to be of the order of INR 33.5 lakh crore, with the micro enterprises alone having an unmet demand of almost INR 10 lakh crores4.

Traditionally, financiers like banks and NBFCs targeting MSMEs have faced three fundamental questions: 1.) Where to find creditworthy MSMEs?; 2.) How to assess their credit worthiness?; and 3.) How to generate “lifetime value” from MSME customers? MSMEs have been geographically dispersed across clusters, the availability and veracity of their financial data has been a challenge, and they have been often serviced through a “high touch” model. All of this has led to traditional lenders incurring a high cost of acquiring and servicing an MSME customer and credit has been largely confined to collateral-based lending. Additionally, financial literacy of smaller MSMEs has been low and they have often been overwhelmed by the documentation and compliance required to tap into formal sources of financing.

These pain points provided new age fintech NBFCs a ready opportunity to try and digitally disrupt the market. Many of them have tried to target the MSMEs with a digital footprint (e.g. those selling their goods and services online) by leveraging alternate data sources like GSTN and Point of Sale (PoS) transactions in order to move away from an asset-based to a cashflow-based lending approach. While this has brought in much needed fresh thinking, we are yet to see meaningful scale that can solve the “hard problem” of bridging the staggering MSME credit gap. To put things in perspective, the government’s e-Marketplace (GeM) and the two giants, Amazon and Flipkart put together have a maximum online seller base of about one million. That represents a small proportion of over 60 million MSMEs in India5. While digitising the GST data is a great step forward, the country has around 90 lakh MSMEs registered under GST6.

The current unprecedented situation though provides some unique opportunities to accelerate the digital transformation agenda of MSME lending at scale.

Given its size and significance, the sector has been a priority for the government’s interventions and we are beginning to see healthy last mile transmission of liquidity. As of 21 September, financial institutions have reported disbursing 1.25 lakh crore to MSMEs under the Emergency Credit Line Guarantee Scheme (ECLGS)7. A recent survey by NIBM estimates that the micro enterprises have been the biggest beneficiary of this credit push, garnering almost 87 percent of the ECLGS8. Thus, the liquidity push is not only helping extend direct credit on the back of government guarantees, but also helping the MSMEs further build their credit histories for smaller ticket loans. A thorough understanding of such small business customers at scale can help financiers identify and digitally target customers with similar credit profiles who are yet to be brought into the folds of formal lending.

Secondly, the MSME lending space is witnessing some significant strengthening of digital infrastructure. With the Account Aggregator framework coming into being and the recent constitution of the Open Credit Enablement Network (OCEN), there is promise to seamlessly connect lenders and borrowers on a marketplace model. If the success of the “India stack” in payments is anything to go by, then this can be an analogous game changer in the MSME lending space.

Finally, as the cash rich “big tech” players expand their focus on the Indian SMEs, we are likely to see expansion of the SME digital footprint beyond the present ecosystem. Awareness creation is a key for this and the current situation provides an excellent opportunity for an outreach to small businesses about digital in a manner that is well-appreciated by both, India and Bharat! SME-focused initiatives like “Namaste Digital”, being undertaken through a partnership between Doordarshan, Google, and select startups, is a great case in point.

Winston Churchill once said that one should “never let a good crisis go to waste”! As the MSME sector looks to recover from the ongoing pandemic, it provides us a number of opportunities to bring about sustained change and accelerate the pace of digital-led interventions.

(The blog has been authored by Suchintan Chatterjee (Partner) and Shweta Shetty (Director), Deloitte India)

DISCLAIMER: The views expressed are solely of the author and ETBFSI.com does not necessarily subscribe to it. ETBFSI.com shall not be responsible for any damage caused to any person/organisation directly or indirectly.





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