By Arun Poojari
MSMEs have come a long way from battling financial roadblocks to becoming key contributors to India’s GDP. Over the past five decades, their journey has been marked by dynamic growth, but it hasn’t been without its challenges. Financial constraints, limited inclusivity, and credit gaps have all influenced this journey—and to some extent, these challenges continue to persist today. As of November 2023, India’s 63 million MSMEs faced a credit gap of $400 billion. This gap is due to several factors, including little or no credit scores, insufficient collateral, and limited access to formal lending.
Additionally, 324.9 lakh MSMEs are based in rural areas, and banks are often reluctant to provide credit as they usually face higher servicing costs due to smaller loan sizes and shorter tenures. Significant efforts are underway to improve this status, with future advancements focused on leveraging technology, alternative credit models, and inclusive strategies. However, realizing this potential depends on the contributions of all sectors—government, fintech, banks, and NBFCs—each playing a vital role in this journey forward.
Fintech’s role in inclusivity and regulatory compliance
Fintech innovation and its diverse product offerings have shown great benefits so far. Regarding lending, these platforms tap into alternative data sources like digital transactions, GST filings, and utility bills to evaluate creditworthiness. This approach makes lending more inclusive and helps MSMEs secure funding more efficiently. Plus, mobile technology and digital payment systems have opened up financial services, improving their credit access. This progress is closely tied to the continued growth of digital transactions, highlighted by the 14 billion UPI transactions recorded in May 2024. This offering extended to rural areas as well. Despite the early obstacle, the surge in digital payments enhances the ability of rural and semi-urban MSMEs to transact securely and manage their finances effectively.
Even government initiatives focused on financial inclusion, such as the Pradhan Mantri Jan Dhan Yojna, further support MSMEs by improving access to banking services. With this, recent years have introduced various technological and regulatory challenges, making it increasingly difficult for MSMEs to adapt without assistance. Fortunately, the evolving fintech market is stepping up by offering solutions for regulatory compliance, customer onboarding, risk management, loan origination, and cybersecurity. They are focusing on tailored offerings to create customized loan products that meet the specific needs of MSMEs to make loan life cycles more agile.
Alternative credit solutions indicate a collective impact
Fintechs and traditional banks harness emerging technologies like AI, blockchain, real-time monitoring, and data analytics to deliver personalized and efficient financial services. This shift is not just challenging conventional banking practices; it’s reshaping how financial transactions are conducted around the globe. To better serve MSMEs, banks are forming partnerships with fintech startups and other financial institutions, creating a broader array of financing options. For instance, a collaboration for granting MSMEs access to alternative financing methods such as peer-to-peer lending, supply chain financing (SCF), line of credit, crowdfunding, and revenue-based financing. All these models share a mutual benefit of low to medium risk with medium to high accessibility.
SCF is particularly advantageous for MSMEs, providing access to working capital financing at lower interest rates than traditional business loans. By offering faster access to capital and better cash flow management, these innovative solutions serve as a model for other markets. Employing advanced technologies further accelerates timely payments to MSME suppliers. Ultimately, fintech lending models equip MSMEs with various tools to address their unique financial needs, paving the way for a future where flexibility and accessibility in business financing are the norm. This collaboration signals a promising era, empowering them to thrive in an increasingly digital economy.
Final call
To create a sustainable future for MSMEs, it’s vital to have robust government support and accessible financing that promotes inclusive economic growth. Fintech innovations in financial services offer a promising opportunity to improve credit access for these businesses. A balanced regulatory framework encourages fintech innovation while providing technological know-how, digital platforms, and financial literacy. As MSMEs continue contributing to economic growth and global competitiveness, dismantling geographical barriers will ensure that both urban and rural areas benefit from equal and tailored opportunities. This requires harmonizing regulations across different regions and facilitating the exchange of successful innovations.
(The author is Mr. Arun Poojari, Co-founder and CEO of Supply Chain Finance platform Cashinvoice, and the views expressed in this article are his own)
