Unlocking India's Digital SME Credit Gap and Economic Potential

The Indian economy thrives on the contributions of the Micro, Small, and Medium Enterprises (MSME) sector, which significantly contributes to the GDP, employment, and exports. In recent years, the MSME sector in India has faced challenges in accessing the credit necessary for growth and expansion. This has hindered the sector's potential to contribute even more significantly to the Indian economy. The sector faces a notable credit gap, presenting challenges and opportunities for financial institutions (FIs) and fintech companies to collaborate and create value. Addressing this credit gap is crucial for unlocking MSME's growth potential and fostering a more self-reliant and sustainable economy. With the rise of digital innovation and technology, a new opportunity exists to bridge this credit gap and drive economic growth. In this blog, we will delve into the challenges of the credit gap in India's SME sector, exploring the potential of digital lending solutions and their impact on the overall economy.

Understanding the Credit Gap in the MSME Sector in India

The MSME sector in India is a cornerstone of the economy, encompassing over 63 million enterprises and contributing ~30% to the country's GDP. It employs over 164 million people, making up ~31% of the workforce. In addition, it accounts for 44% of the country's exports, highlighting its vital role in India's economic landscape.

As per a report published by the World Bank/IFC in November 2018, the addressable credit gap in the MSME sector was estimated to be INR 25.8 trillion (US$ 397 billion). The micro, small, and medium enterprise segments respectively account for INR 8 trillion (US$ 123.3 billion), INR 16.8 trillion (US$ 258.6 billion), and INR 1 trillion (US$ 15.6 billion) of the debt gap that is viable and can be addressed by financial institutions.

Micro and small enterprises account for 95 percent of the viable debt gap financial institutions can address.

Source- IFC, World Bank

Exploring the Future of India's Digital SME Credit Gap

As India's GDP is expected to reach US$ 5 trillion, MSMEs will play a pivotal role in accelerating this growth, with the sector's exports projected to reach US$ 1 trillion by 2028. MSMEs will require more credit to invest and grow to achieve this level of exports, implying immense potential for growth and development for the institutions offering credit to MSMEs. As per the latest available data, the MSME segment's share of commercial loan originations increased by 38% in FY22, compared to 27% in FY21, reaching a total value of Rs 25.3 trillion (US$ 304 billion), accounting for 38.1% of the total originations value of Rs 66.6 trillion (US$ 801 billion). This demonstrates significant growth in lending to the MSME sector. This significant growth reflects the increasing demand for credit among SMEs and the expanding opportunities for financial institutions and fintech companies.

In addition to lending, there are niche opportunities in credit demand, technological advancements, export financing, supply financing, and advisory services. These opportunities represent diverse areas where digital lending and financial technology can significantly impact. For example, technological advancements such as digital KYC (Know Your Customer) processes, credit scoring models, and automated loan origination systems can enhance the efficiency and accuracy of lending operations. Export financing and supply financing provide avenues for supporting SMEs in expanding their international trade activities and optimizing their supply chain operations.

Overall, the future of digital lending in India's MSME sector is characterized by the potential for inclusive growth, technological innovation, and the empowerment of small businesses. By embracing digital lending and financial technology, FIs and fintech companies can play a vital role in fuelling the country's economic progress and supporting the aspirations of MSMEs as key drivers of India's economic landscape.

Unleashing the Economic Potential of India Through Digital SME Credit

Digital lending platforms and fintech solutions have emerged as powerful tools in revolutionizing how SMEs can access credit. These platforms offer faster, more efficient, and more inclusive financing options, providing a lifeline for MSMEs looking to grow their businesses. By leveraging these digital solutions, small and medium-sized enterprises (SMEs) are gaining access to the credit they need to thrive, leading to increased productivity and economic contribution.

Access to finance is a critical factor in unlocking the economic potential of any country. By providing easier credit facilities for SMEs, including micro and short-term loans and profitable and instant loans for unbanked and new-to-bank customers, digital SME credit can significantly impact creating a more self-reliant, self-sustainable, and less volatile economy in India. With the right tech platform, businesses can enhance their capabilities and achieve their vision. Nucleus Software, for example, offers a next-generation lending solution designed to meet the needs of all retail and corporate lending, including MSMEs. Their end-to-end lending solution simplifies the lending process, from sourcing through customer acquisition management to servicing, with a robust collateral management system. Such technological advancements enable FIs and fintech companies to deliver better loan sourcing, faster onboarding, better loan servicing, and reduced customer delinquencies, thereby contributing to India's economic growth.

Government Initiatives to Support Digital SME Credit in India

The Indian government has recognized the importance of digital SME credit in driving economic growth and has introduced several initiatives to support and promote the sector. Some of the initiatives are.

• Prime Minister's Employment Generation Programme (PMEGP): This is a major credit-linked subsidy program to generate self-employment.
• Pradhan Mantri Mudra Yojana (PMMY): This initiative provides loans of up to US$ 12067 (Rs. 10 lakh) to non-corporate, non-farm small/micro enterprises. In FY23, 6.23 crore loans were sanctioned under this scheme.
• PM Vishwakarma Scheme: This Central Sector Scheme has a budget outlay of US$ 1.56 Billion (Rs. 13,000 crore) for its implementation from 2023-24 to 2027-28. The scheme aims to provide end-to-end holistic support to artisans and craftspeople who work with their hands, using tools, in the 18 trades covered.
• Credit Guarantee Scheme for Micro and Small Enterprises: This initiative aims to strengthen the credit delivery system and facilitate the flow of credit to the Micro and Small Enterprise sector without the hassles of collateral and third-party guarantee, up to a maximum of US$ 603,369 (Rs. 5 crore).
• Udyam Assist Platform: Launched on 11.01.2023, this platform brings Informal Micro Enterprises (IMEs) under the formal ambit of MSME to avail the benefits under Priority Sector Lending.
• Inclusion of Retail and Wholesale traders as MSMEs: Retail and wholesale traders are now included as MSMEs to avail of Priority Sector Lending benefits, effective from 02.07.2021.
• Non-tax benefits for MSMEs: Non-tax benefits are extended for three years in case of an upward change in the status of MSMEs.
• Trade Receivable Discounting System (TReDS): This system facilitates financing MSMEs' trade receivables from corporate and other buyers, including government departments and public-sector undertakings (PSUs) through multiple financiers.
• Self-Reliant India (SRI) Fund:  US$ 6.03 Billion (Rs. 50,000 crore) equity infusion through the Self-Reliant India (SRI) Fund.
• Emergency Credit Line Guarantee Scheme (ECLGS): The US$ 60.33 Billion (Rs. 5 lakh crore) Emergency Credit Line Guarantee Scheme was announced during the COVID-19 pandemic to fill the credit gap in MSMEs. The scheme was operational till 31.03.2023.

Conclusion

The digital SME lending market in India presents both challenges and opportunities. One of the key challenges is the availability of reliable and accurate data for credit assessment, especially for SMEs with limited financial documentation. The risk of fraud and cyber threats also poses a constant challenge for digital lending platforms. However, by implementing robust security measures and fraud detection systems, FIs and fintech companies can overcome these challenges and provide SME owners with the credit they need to thrive.

In conclusion, the credit gap in the MSME sector in India presents challenges that can be addressed through digital lending and technology. By embracing digital lending, FIs and fintech companies can bridge this credit gap, fuel economic growth, and create a more self-reliant and sustainable economy. The rise of digital lending in India has the potential to transform the MSME sector, unlock India's economic growth, and pave the way for a brighter future. With the support of government initiatives and the adoption of innovative solutions, the future of India's digital SME credit gap looks promising. By empowering SMEs and providing them with the financial resources they need, we can unleash India's economic potential and pave the way for a brighter future.