How can fintech companies lend a helping hand to MSMEs?

How can fintech companies lend a helping hand to MSMEs?

Woman with laptop and financial growth graph

A little introduction about MSME

The Micro, Small and Medium Enterprise sector in India is key to the growth of India’s economy. Around 75 million MSMEs contribute to about a third of the GDP and 45% of the manufacturing output of the country. These companies also provide employment to more than 110 million Indians. The sector’s sustained growth and health are important to achieve India’s GDP growth targets.

The sector is currently seeing a huge credit gap. According to a BizFund report, only 16% of MSMEs in India receive formal credit leaving more than 80% of these companies under-financed or financed through informal sources. Informal credit ends up being much more expensive than formal debt making it difficult for MSMEs to address accumulated debt burden.

1. FinTechs are bridging the credit gap:

A combination of factors is allowing companies in the Fintech domain to cater to this credit gap.

The first one is the continued effort by the government to digitise MSMEs – through skill development, GST rollout and wider availability of Aadhaar based KYC to catalyse growth on all fronts. This has provided opportunities to FinTechs to provide data and technology based services to MSMEs.

The second factor is the availability of alternate data (cashflows, online reputation etc.) over traditional data inputs like financial assets and collateral.

The third is the availability of technology to assess data that can help in building credit models that can be tailored to different segments of MSMEs.

2. FinTechs are helping in Financial Inclusion

Perhaps, one of the most interesting aspects of FinTechs is Financial inclusion of the Next Half Billions of Indians. Meaning, FinTechs are actively reaching out to lower income and unserved employees of MSMEs through strategic tie-ups with the employers. These are mostly unserved/underserved by many banks. Thanks to the increased digital footprint and online transactions, even in remote locations.

3. FinTechs provide tailor made solutions to MSMEs

FinTechs focus phenomenally on the extent of digitisation in MSME. The extent of digitization of the operations will determine the cost of debt and the amount of hand-holding required to build a data model for the company. Close scrutiny of these two parameters will help Fintech players in assessing risk and providing tailored solutions as per the MSME’s requirement. 

Digitisation can provide easy access to various data by which FinTechs can build models. Such models help in providing customized solutions coupled with diversified products such as insurance and investment. Apart from diversifying the portfolio this will also help fintechs in setting up analytics to improve credit risk models and containing fraud.

Fintechs have just started making inroads into MSME digital funding, through innovative, data-based lending models. The World Bank estimates the current credit gap for MSMEs in India to be at $ 380 Billion. With continued digitisation efforts and improved regulatory norms for data security and protections this credit gap is all set to be addressed by digital lenders. Experts opine that the time is right for fintechs MSME lending to make it big in the evolving story of India’s fintech space. 

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