NASDAQ pegs India amongst the world’s five fastest-growing economies, overtaking the Chinese Dragon by a small margin. Our country stands to become one of the greatest growth engines in the world, and the MSME sector will be playing a crucial role in this.
However, this statement must be taken with a pinch of salt, as vitalizing the growth of MSMEs will be accompanied by its fair share of challenges. Dalai Lama’s timely quote comes to mind: “Whenever there is a challenge, there is an opportunity to face it, to demonstrate and develop our will and determination”. On this thought, let’s delve deeper into how leveraging finance can enable MSME’s unlock the 100bn USD potential of rural India.
As per the International Finance Corporation, there are 55.8 million MSMEs employing close to 124 million people in our country. Close to 60 per cent of these are based in rural areas. In all, the MSME sector accounts for 31% of India’s GDP and 45 per cent of its exports. The lack of adequate and timely access to finance continues to remain the biggest challenge for the growth of the sector.
Easier and cheaper credit through digital lending has the potential to trigger a virtuous cycle for formalisation and unlock the 100bn potential of rural India. According to a recent study conducted by Omidyar Network and consultancy firm BCG – Up to 60 per cent of MSMEs depend on informal sources of finance. Additionally, an increasing number of MSMEs are willing to share their data online and 60 per cent believe they will get larger amounts of payments through innovative approaches to finance and distribution in the coming years.
Despite an increase in financing to MSMEs in recent years, the addressable credit gap in the MSME sector is estimated to be INR 25.8 trillion, which formal financial institutions can viably finance in the near term. The overall demand for both debt and equity finance by MSMEs is estimated to be INR 87.7 trillion, which comprises INR 69.3 trillion of debt demand and INR 18.4 trillion of equity demand. The forecasted figures present a picture of teeming potential, waiting to be unlocked in the near future.
Inadequacy in the number of trained personnel to specifically cater to the needs of MSMEs, paired up with the lack of customized business loans and the onerous compliance requirements are some reasons that have stifled enterprise growth of this sector.
Given that MSMEs essentially rely on traditional or inherited skills and the use of local resources, particularly in rural and industrially underdeveloped areas, MSMEs have the ability to empower traditionally resource-poor communities and markets to mobilize products and services, both nationally and globally.
Take, for instance, a fin-tech entity has provided a business loan to a small-scale peanut-growing farmer in rural Gujarat (IndianExpress). The loan would enable the farmer to increase production, up-scale their infrastructure and set up a transparent and profitable supply chain. This will also generate employment and entrepreneurial opportunities for the local youth, with a lasting impact on the local economy and chance participation in the export system.
On the systemic side, well-rounded fiscal support, a strong policy framework, and incentives promoting innovation by financial institutions can significantly increase the penetration of formal financial services to the MSME sector. For the traditional banking structure, revamping the credit appraisal processes with a focus on alternative data for assessing the capacity and willingness of the borrower to repay the loan has to be taken into account.
Innovations in the digital ecosystem and enhancement of reach are not enough to substantiate the overall growth of the MSME sphere as often factors such as poor documentation, lack of clear credit history, and the existing digital divide come off as roadblocks (helps with assessing the prospective borrower). However, fintech lenders that specialise in a high-touch high-tech model of distribution with novel approach to underwriting can potentially assess the prospective borrower even in the rural hinterland of the country.
Fintech lenders offer MSMEs a robust alternative to traditional banking systems, through their digitally-backed reach and novel approach to understanding creditworthiness. Leveraging technology-enabled data analytics to draw up a social, behavioural and financial portrait of borrowers, fintech lenders are better informed about the borrowing and repayment ability of a customer. Fintech entities deploying a high-touch model with last-mile coverage deliver a personal touch and attention to their finance and distribution services, thus helping with building a long-standing relationship between the prospective borrower and lender.
Another avenue for unlocking the 100bn potential of rural India is the provisioning of productivity-enhancing offerings in the form of easy loans, risk mitigants, and farm mechanisation services. An innovative approach could be of considering the rural household as a cohesive economic unit, situated at the interplay of diversified community dynamics. Such an approach de-risks the consumer or the rural household through better forward visibility and engagement with respect to household cash flows and income/asset creation.
The rise in financial technology is expanding financing options for MSMEs and pushing traditional lending players to diversify and build their capabilities in borrower outreach, credit assessment and data analytics. In order to harness the full potential of this transformation, the enabling environment, including the regulatory framework, investor capital and technology intermediaries, should also be strengthened.
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