The Micro, Small and Medium Enterprises (MSME) sector plays a vital role within the Indian economy. While the pandemic and the aftermath of restrictions to curb the coronavirus has been hard across enterprises, its impact on small businesses is particularly marked.
The significance of MSME contribution is not unnoticed and has been a focal point for Government’s initiatives for a while now. In June 2019, the Expert Committee on Micro, Small and Medium Enterprises, headed by UK Sinha, submitted a proposal to the RBI Governor with some critical observations about the sector. “Due to their informal nature, MSMEs lack access to formal credit as banks face challenges in credit risk assessment owing to lack of financial information, historical cash flow data, etc. Further, very few MSMEs are able to attract equity support and venture capital financing,” stated the report, highlighting the need for credit access in the sector.
The report quotes that the “total addressable demand for external credit is estimated to be ₹37 trillion while the overall supply of finance from formal sources is estimated to be ₹14.5 trillion Therefore, the overall credit gap in the MSME sector is estimated to be ₹20 – 25 trillion”. Since access to credit is the lifeblood of any business, it is in the interest of the economy that the MSMEs have adequate funding to flourish.
Here are a few ways the credit gap can be addressed:
Strengthening Regulatory framework
MSMEs may tend to borrow from informal lending systems without formal access to funding. However, such access to traditional credit requires formalisation and standardisation of small businesses’ balance sheets and books of accounts. The introduction of the GST may have transitioned many transactions into the formal purview, but a lot still needs to be done.
The regulatory framework that records and discloses financial transactions within a financial accounting and recording system could help lenders make better credit assessments. First, however, there has to be compliance from MSMEs and a willingness to access the advantages of formal credit.
The use of technology-enabled systems to reach out to customers has been a game-changer. Traditionally, customers relied on branch-based interactions with representatives from local banks and NBFCs. Digital platforms have made physical presence redundant and eliminated the restriction posed due to geographical boundaries.
Besides, due to increased internet penetration, smaller players in remote areas can access the best and most competitive formal line of credit.
Additional Read: Five ways working capital can work for your business
Offering customised solutions
Customised products will be more effective in encouraging MSMEs to avail of credit opportunities. Machine learning algorithms and data analytics provide information that helps lenders customise product offerings suited to meet client needs.
For instance, MSMEs may require loans of much shorter durations as many of these businesses are still growing and might need an immediate cash infusion to continue operations. Pre-approved loans or working capital loans can offer a stable credit line for such businesses to utilise on-demand.
The traditional processes of loan application and approval involve tedious paperwork and long processing times. But today’s dynamic business environments and growing small businesses might require prompt access to capital.
Lenders backed by technology, like Tata Capital, can reduce the processing time drastically. As a result, the application process becomes faster, and so does the turnaround time for loan approvals. Faster turnaround can incentivise MSMEs hesitating to opt for formal credit channels to benefit from such timely advances.
Multichannel access to lenders
Digital Lenders today have an omnichannel presence. Besides mobile applications and digital interfaces, a borrower can also use social media or messaging apps such as WhatsApp to apply for loans. This added benefit makes the application process convenient and familiar for MSMEs.
Additional Read: Data transforming SME lending
At Tata Capital, we are committed to supporting small businesses and partner in their progress. So, reach out to us to know more about how we can help your business and offer funding at competitive rates of interest to propel your growth.