The evolution and impact of digital lending in boosting credit for MSMEs

Digital lending has created a tectonic shift in the Micro, Small and Medium Enterprises (MSME) ecosystem, bringing relief from wading through endless paperwork, enduring multiple visits to the bank, and waiting weeks for approval.

Obtaining a loan was often a cumbersome and disheartening journey that left many potential borrowers giving up on their dreams even before they could take flight, especially from underserved communities. Accessing credit was a privilege reserved for the few who could meet stringent criteria and overcome bureaucratic hurdles.  

A 2023 report by Ernst & Young stated that the digital lending market in India is expanding rapidly with total disbursement expected to surpass Rs 47.4 lakh crore by 2026. In the quest to transform into Digital Bharat, aspiring to achieve a $5 trillion economy by 2025 and ultimately a $10 trillion economy by 2030, digital innovation, including advancements like digital lending, plays a pivotal role.

Fast forward to today, the financial landscape has transformed by the advent of digital lending—a revolution that has made borrowing faster, more accessible, and less intimidating than ever before.

In the context of the Government’s initiative of Viksit Bharat, which emphasises empowering MSMEs, digital lending plays a pivotal role. MSMEs are crucial contributors to the economy and digital lending offers them simplified access to credit.

India is at the cusp of an economic breakthrough and digital intervention has had a profound impact on MSMEs, which constitute the backbone of the economy. According to recent statistics, MSMEs contribute around 30% to India’s GDP and employ over 110 million people. Despite their critical role, these enterprises have historically faced significant challenges in accessing timely and adequate financing. Approximately 95% of MSMEs operate in the informal sector, making traditional credit inaccessible for many. Furthermore, only about 15% of these businesses have access to formal credit, leaving a significant credit gap estimated at $240 billion.

Digital lending represents a shift in traditional banking practices. It leverages technology to streamline the borrowing process, offering a seamless, fast, and user-friendly experience. Unlike traditional lending, which relies heavily on physical interactions digital lending uses algorithms powered by machine learning, artificial intelligence (AI), and big data to analyse vast amounts of data to evaluate and approve loans within minutes. It democratises access to credit, enabling individuals and businesses, especially those previously underserved, to secure the funds they need quickly and efficiently.

While large scale businesses have processes in place, they benefit strongly from this innovation adding to their agility, MSMEs on the other hand are usually working with leaner teams and most likely are short on time and resources and digital lending can further bolster their businesses by giving them fast access to capital.

By providing MSMEs with tailored solutions, digital lending benefits them with:

• Accessibility: Digital lending platforms have significantly enhanced accessibility to credit, particularly for MSMEs located in remote or underserved areas. By eliminating geographical barriers and reducing the need for physical visits to banks, these platforms ensure that even small businesses can access financial resources swiftly and conveniently.
• Co-lending ecosystem: Co-lending refers to a collaborative financial arrangement between two or more lenders who join forces to extend credit to a specific target audience. Under this arrangement in the digital lending space, both banks and NBFCs share the risk. By partnering with NBFCs, traditional banks can use fintech tools to reach unbanked sectors. NBFCs can invest less capital while leveraging their tech expertise to capture larger market shares through these loan applications. Co-lending has significantly boosted the digital lending space by enhancing lending capacity, refining credit evaluation processes, and reducing interest rates.
• Artificial Intelligence (AI) Transformation: AI has streamlined manual processes and automated lending for customers. Now, lenders can quickly access borrower information, assess creditworthiness, and provide better customer support through AI-powered software. This advancement in lending has made it easier for various segments of society, especially MSMEs, to access credit without the delays of traditional loan processes. This inclusivity empowers women entrepreneurs, rural businesses, and startups to thrive, contributing to broader economic development and social upliftment.
• Speed and Efficiency: Traditional loan processes that could take weeks or months for approval have been condensed to a matter of days or even hours with digital lending. This speed is crucial for MSMEs, allowing them to seize timely business opportunities, manage cash flow effectively, and invest in growth initiatives without delays.
• Flexibility and Customisation: Digital lenders offer more flexible loan terms and repayment options tailored to the cash flow cycles and seasonal fluctuations typical of MSMEs. This customisation ensures that borrowing does not become a burden but rather a strategic asset to fuel business expansion and innovation.

This empowerment enables MSMEs to thrive, innovate, and drive economic progress, highlighting the transformative impact of digital lending on the sector.

By facilitating easier access to credit for MSMEs, digital lending stimulates entrepreneurship, fosters innovation, and enhances productivity across sectors. This, in turn, creates jobs, boosts income levels, and contributes to overall economic resilience and sustainability. Overall, digital lending has emerged as a catalyst for transformation in the MSME sector within Digital Bharat.

(Harshvardhan Lunia is the CEO and Founder of Lendingkart Group)