Can the digital maturity of MSMEs in the post-COVID era be a measure to assess creditworthiness?

Actionable insights such as GST payments, transaction flows, Provident Fund (PF) payments, and others are helping lenders assess MSME creditworthiness better and ensuring that small businesses get the credit they need.

No single sector remains untouched by the massive transformation brought by the global pandemic. 

Micro, small, and medium enterprises (MSMEs) are no different.

In fact, as the pandemic continued and lockdown restrictions became more stringent, more and more consumers were pushed to take the digital route to conduct their business. This gave the pace of formalisation and digitalisation of MSMEs a huge boost. 

From strengthening digital payments, managing distance transactions, and promoting direct-to-consumer (DTC) models to increasing digital commerce, the immediate benefits of digital interventions are vast.

This rapid digital adoption by customers and MSMEs has opened doors that were unthinkable until a few years ago.  

How is digitisation bringing financial transparency and inclusivity?

According to reports, India had approximately 6.3 crore MSMEs as of November 2021. All these businesses are leveraging cutting-edge digital technologies to avail all sorts of opportunities. By taking transactions and payments online, businesses increase their financial transparency and provide comprehensive cash flow insights to potential investors or creditors.

The increased digital footprint of MSMEs, put together by considerable private and public data (consensual), enables lenders to conduct better credit risk modelling.

Unlike a few years ago, the only cash flow visibility a business could show at the end of a financial year was in the form of annual report filing. 

However, things are different today. 

Over the past few years, GST payments, transaction flows, Provident Fund (PF) payments, and other reliable documentation can be accessed on a month-on-month basis. These actionable insights enable lenders (banks or other financial institutions) to assess MSME creditworthiness better.

Undoubtedly, the newfound digital maturity will also help MSMEs get the much-needed credit to strengthen their business over time.

What does the future hold?

Globally, one of the most prominent constraints faced by MSMEs is access to cheap credit. 

For ages, this sector has been duelling with the credit gap exploited by the traditional modes of assessing creditworthiness. Conventional creditors like banks considered these businesses as high-risk due to their lack of financial documentation, uncertain business plans, lack of collateral, or past records. As a result, they preferred giving credit to larger firms. 

In fact in 2021, several leading news outlets reported that traditional lending institutions (banks) had only deployed 1.1 percent  more credit to MSMEs in August vis-a-vis the previous year. 

However, digitisation and massive real-time data have now made it possible for banks and other financial institutions to assess the creditworthiness of MSMEs through unconventional mediums. 

In the upcoming years, mobile usage, cloud-based services, big data analysis, and new-age technologies will continue to flourish. They will give ample opportunities to underserved MSMEs in need of credit to approach banks and NBFCs. 

Many banks and financial technology institutions have already started joining forces to assess MSME creditworthiness in a new light. Digitisation also enables banks and other lending institutions to expand their customer base by simply plugging in fintech.

This is a brand-new era of growth, one where MSMEs can effectively eliminate financial constraints from the equation. 

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)

Edited by Teja Lele Desai


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