Innovations, digital finance platforms key to solving India's MSME credit crisis

In a post-COVID era, MSMEs' demand for loans has increased significantly, and digital platforms are supremely important to help service those demands and bridge the gap between small businesses and institutional financial services.
 
Digital financial solutions in India today have helped envisage a new way for the country's roughly 43 million medium and small enterprises to borrow money - and that's no small feat considering institutional financial services providers only service 16 percent of the total credit demand that comes from the sector.  Because India’s MSME sector is so fragmented and largely unorganised, discovery of credit demand poses a huge challenge for banks. 

“Reaching small businesses is a costly and time-consuming affair for banks, especially considering that MSMEs hardly ever ask for big-ticket loans. So, for banks, expending so much time and effort for sachet loans doesn’t seem worth it,” Dr Pramod Varma, Chief Architect of Aadhaar & India Stack, who also advises the NPCI, said on the sidelines of the Bangalore Tech Summit 2020.

 A lack of credible data about MSMEs’ and SMEs’ financial status and behaviour is another big concern for lenders. Even if they do manage to obtain the data, somehow, verifying it is a hassle. 

“Government bodies and institutional lenders want to tap this opportunity, but they’re not able to because the sector is still unorganised,” Dr Pramod added. 

For banks, being able to lend to millions of small enterprises is an attractive proposition because it plays into unit economics. But the high cost of servicing these credit requests means the loans they eventually disburse carry higher-than-normal interest rates - and this cost of borrowing may not make economic sense for small businesses.