SME and MSME Digital Lending in IndiaThe easier and cheaper credit through digital lending has the potential to start a virtuous cycle of formalization, so much so that up to 85 per cent of MSMEs could be formal by 2023

SMEs and MSMEs are the backbones of most economies. While the large industrialists and enterprises often take the economic spotlight, it is these small businesses who keep an economy functioning, providing employment, maintaining liquidity flow and developing an entrepreneurial spirit. Specifically for a labour-intensive economy such as India, SMEs and MSMEs prove vital to generate localized income opportunities.

The State of the Industry:

However, they have still not got the importance they deserve considering the pivotal role they play. In fact, India's 60 million MSMEs are facing a credit shortfall of a massive USD 400 billion. Access to finance has been one of the primary obstacles to their growth. For a majority of SME and MSME entrepreneurs, non-formal sources such as private moneylenders still serve to be the go-to people for funds. The Indian banking system has failed to reach out to this segment with as much excitement and focus as it should have. Lengthy documentation procedure, non-optimized methods of credibility verification, rigid payment structures etc. have made formal sector borrowing a bad deal for the sector.

The introduction of digital lending, however, has bolstered the hopes of the SME and MSME players. According to the latest report by Omidyar Network and Boston Consulting Group, digital lending has great potential to disrupt the status quo in MSME and SME dedicated financial services. The report highlighted that digital lending to MSME's is projected to increase between 10-15X by 2023 to a valuation between 6-7 lakh crores annually.

Till 2016, digital lending was still taking baby steps in the SME and MSME lending segment and the entrepreneurs were availing money from offline sources who charge 2.5X more than the average rate of interest. Then demonetization happened, and it set the digital lending ship sailing. Indian citizens awakened to the entire India of digital commerce. Then came the Unified Payments Interface (UPI) launch supported by Aadhaar-based e-KYC and the 2017 Goods and Services Tax (GST), which led to a significant number of MSMEs to formalize and digitize their businesses.

The New Age:

New age digital lenders run a digitally optimized credit facilitation process, which allows for end-to-end lending with loan approval times as short as a day. Furthermore, they have tech-focused creditworthiness checks that identify the potential of the business and numerous other factors rather than just basing the check on past accounts. This has helped new entrants considerably,

A Boost of Cheap Rates:

The easier and cheaper credit through digital lending has the potential to start a virtuous cycle of formalization, so much so that up to 85 per cent of MSMEs could be formal by 2023. By accumulating data, these digital lenders are also creating a strong data stream which provides lenders with important information to facilitate underwriting decisions. In fact, digital lenders are already establishing partnerships with platform-based businesses which deal with a large number of MSMEs, such as e-commerce enterprises, online aggregators etc.

The huge SME and MSME sector of the Indian economy needs to be bolstered with adequate opportunities to finance and other resources to reach its potential. Even now, the sector lags behind the US by 10 percentage points and to China by 23 percentage points in terms of GDP contribution. With digital lending, this sector can finally have the boost it was looking for, moving toward a seamless, efficient and easily accessible financial framework that strengthens the sector and the Indian economy as a whole.