Why digital lending through alternative platforms for MSMEs is need of the hour
As the world reels under the impact of the global COVID-19 pandemic, India is grappling with the twin crisis of curbing the rapid virus spread and economic unrest. The pandemic has battered all sectors of the economy with the country’s Micro, Small and Medium Enterprises (MSMEs) being the worst hit.
In 2019, MSMEs contributed around 29 percent to India’s GDP, and the government had ambitious plans to increase the sector’s contribution to 50 percent in the coming years. While MSMEs were considered the growth drivers of the Indian economy, the pandemic and the consequent stoppage of economic activities triggered panic across the nation.
The lack of income generation, migration of labour, and health and safety compliance further added to businesses risking extinction. Additionally, the deficiency in the access to finance, due to the abridged lending capacity of banks, added to the woes of MSMEs.
The potential of digital lending for MSMEs’ revival
The government announced several steps to support the revival of the MSME sector. In May, Finance Minister Nirmala Sitharaman announced six COVID-19 relief measures to make MSMEs ‘aatmanirbhar’ (self-dependent).
The government also regulated banks to support the sector with schemes for stressed MSMEs, such as the Emergency Credit Line Guarantee (ECLG). While the government has mandated public and private sector banks to offer help, the sheer volume of monetary support required to pull businesses out of the crisis is huge. The entire lending and financial ecosystem need to support MSMEs with agile credit solutions for a macro-economic impact.
In the current situation, digital lending by fintech players can significantly benefit MSMEs to emerge out of the crisis and aid in India’s COVID-19 economic recovery. A line of credit will help MSMEs get access to quick capital, especially as fund cycles have been disrupted either by supply-chain breakages, labour issues, or adverse cash flows during the national lockdown.
Additionally, the ease in accessing a loan with a fast-tracked process, including hassle-free eKYC and speedy document verification, can play a key role in kick starting cash-crippled businesses.
The right time for MSMEs to embrace digital
To harness the full potential of digital lending, MSMEs often require a robust digital footprint as a criterion to access finance from fintech lenders. However, out of the 75 million MSMEs based in India, only 16-18 million have a digital presence, which includes social media, online listing, or a website.
Furthermore, the Reserve Bank of India has urged complete digitisation, including payments for MSMEs, thus accelerating digital adoption for the ones that are yet to do so. With a digital presence, MSMEs can get a more formal financial record, which gives them access to broader financial services. Many fintech players are also supporting offline MSMEs by creating an online identity with their business page as well as innovative customised solutions.
Fintech also offers point-of-sale transaction-based lending, bank, and fintech partnership models, invoice discounting exchanges, marketplaces, captive models, and P2P models that can boost the revival of the MSMEs.
With technology and innovation at the heart of fintech’s existence, they can enhance the lending ecosystem for MSMEs by leveraging AI and ML solutions to underwrite the risk of providing credit and financial services to people that banks won’t. Traditionally, credit bureau scores have been used as a benchmark for one's credit history and repayment behaviour.
Thin-file or no file usually makes it difficult for the borrower to seek loan approvals. Using these next-generation technology tools, digital lenders can verify data more efficiently through more verification routes. This will dive financial inclusion and accelerate disbursement to MSMEs across geographies beyond metro cities and profiles.
The revival of the MSME industry has the potential to support citizens, boost employment, and contribute to the economy. According to the Sixth Economic Census released by the Ministry of Statistics and Programme Implementation in 2018, women constitute around 14 percent of the total entrepreneur base in India.
Additionally, 10.8 percent of the total disbursements of the 17,000 MSMEs assessed for FY19-20 were towards businesses that were run by women either as sole proprietors, partners, or directors.
Hence, digital lending to MSMEs — especially first-generation entrepreneurs and women — through alternative platforms is the need of the hour as they are starved of the opportunity due to lack of credit.
The COVID-19 crisis should also be taken as an opportunity for MSMEs to embrace digital presence for ease of financial support and business growth and social upliftment, today and in the future.
Edited by Saheli Sen Gupta
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