India has approximately 630 Lakh MSME corporates of which only 250 Lakh have ever been credited. While the sector continues to grow at a projected compound annual growth rate (CAGR) of 2.5 per cent, in the coming times, the approximate number of MSME corporate entities is expected to touch 750 Lakh. Out of this estimate, around 500 Lakh are expected to be NTC (New-to-Credit) MSME entities, highlighted a recent joint report by TransUnion CIBIL and SIDBI.
With a 30 per cent share of the economy’s GDP and 45 per cent share of the total employment, MSMEs are the growth engines of the Indian economy. MSME Loans is an important component of commercial loan market contributing about 85 per cent by volume as of March 2021.
However, despite its importance in shaping the country’s socio-economic development, MSMEs face a major challenge in obtaining sufficient financing, with an estimated credit gap of Rs 33 trillion. According to an IFC report, formal credit supply addresses only USD 165 billion (Rs 10.9 trillion) worth of MSME financing needs. The overall finance demand by MSMEs is Rs 69.3 trillion, with 70 per cent of the credit requirement attributed to filling working capital gap.
MSMEs borrow from informal sources for financing their needs due to lack of documentation or credit footprint. Credit access can help unorganised MSMEs integrate into the formal economy, compete with global players, and gradually transition into the organized, formal sector.
The overall finance demand by MSMEs is Rs 69.3 trillion, with 70 per cent of the credit requirement attributed to filling working capital gaps. Working capital finance is an important aspect for the fledging MSME business. It is imperative to address huge credit gap that exists in meeting urgent fund requirements. There are no MSME-focused sachetised products. Lenders rely heavily on assets earmarked against term loans, leaving MSMEs out of sachetised loans for working capital gaps, revealed a latest report by 1Lattice.
MSME working capital loans act as “cushion” to help with short-term cash issues. One of the primary reasons for obtaining a working capital loan is to obtain funds during periods of low demand in the business cycle. Structured and intuitive working capital management allows MSMEs to seize new business opportunities and acts as a lifeline in turbulent and unforeseen times.
MSMEs are a major yet overlooked drivers of the national economy. Various factors such as complexity of MSME finance, unavailability of credit, regulatory issues, low scalability, labor problems, and absence of standardized policies have contributed to the problem.
The total Indian loan outstanding market stands approximately at Rs 174 trillion and grew about 100 per cent between FY17 and FY22. Retail and Commercial lending each account for about 49.5 per cent of the total lending market as of March’22, highlighted the 1Lattice report.
MSME segment witnessed an increase in the originations share by value of about 38 per cent in FY22 as compared to 27 per cent in FY21 under commercial loans. The total volume of originations stands at 22.2 lakhs in FY22 out of which 87.9 per cent (19.5 lakhs) accounts for the MSME borrower segment. The total value of originations stands at Rs 66.6 trillion in FY22 out of which 38.1 per cent (Rs 25.3 trillion) accounts for the MSME borrower segment, the report further stated.
Micro borrower segment continues to dominate originations (by volume). However, there is a decline in share from 53.7 per cent in FY21 to 46.1 per cent in FY22. Despite a decline in the Micro segment’s volume in FY22, the share of value from this segment has surged from 4.7 per cent in FY21 to 12.4 per cent in FY22.
There has been an increase in originations share (by value) of MSMEs from 27.2 per cent in FY21 to 38.1 per cent in FY22. Originations by value have been dominated by the large corporation throughout FY19-FY22. However, there has been a decline in the share from 73.6 per cent in FY19 to 56.3 per cent in FY22, the report added.
FinTechs & NBFCs help solve creditworthiness of MSMEs
Traditional lenders require MSME borrowers to provide credit history, formal records, business vintage, etc, which excludes many small businesses from formal lending ecosystem. Heavy reliance on previous credit history & lack of understanding of digital lending solutions cause difficulty in assessing the creditworthiness of MSMEs.
Fintech and NBFCs are revolutionising the MSME lending space and helping solve creditworthiness issues among banks using alternate data processing & technology. New age/ Fintech players have been risk modeling the SME’s by creating credit scores (for those who lack previous credit history) so that NTC customers are able to get loans, highlighted the 1Lattice report.
Fintech and NBFCs can help banks overcome information asymmetry regarding MSMEs. In India, the unsecured NBFC and fintech lending landscape has emerged, with several new players solely catering to MSME segment. NBFCs & FinTechs leverage their distribution strength & superior customer underwriting with banks that have cheaper capital & better risk management processes.
The way forward for MSMEs in India
Untapped potential of MSMEs could be unfolded with the Government induced policies and new age Fintech players. The Indian government intends to increase annual MSME financing disbursements to roughly Rs 6 lakh crore by 2023. Banks have sanctioned loans worth Rs 3.1 lakh crore under the ECLGS for the MSME sector.
The majority of the credit deficit will be required to be filled by structural, market-driven solutions. As a result, fintechs/new age players are using technology to eliminate market inefficiencies, making lending more accessible, affordable, and contextual for MSMEs, said the 1Lattice report.
The shift brought about by digital lending is changing the optics of MSME lending. What was once an onerous and time-consuming task is becoming an easily accessible business decision with the synergy of new age players, banks and government regulations.
Unsecured MSME lending in India is expected to reach Rs 7.5 trillion by FY26 with digital lending channel expected to grow approximately at 29 per cent CAGR. MSME merchant base is expected to rise to 14 million in FY26. Digital penetration in MSME unsecured lending is expected to rise to about 20 per cent in FY26, the report added.
Due to the rapid adoption of digital technologies by MSMEs and the country’s accelerating digital connectivity, the digital presence will gradually increase and should reach 20 per cent by FY26.
