Alternate Lending Platforms Are Fixing India's Financial Inclusion Problem, Beco...

Jul 2018
India, July, 11 2018 - Today, India's MSMEs and their business owners are finding new-age digital startups and alternate lending platforms to be the most effective institution to disperse credit.

On June 27th, the world celebrated UN Micro, Small, and Medium Enterprises (MSME) day for the first time to pay its respects to the small companies that are the backbone of most economies worldwide, especially in the developing world. On the occasion, the international body identified access to finance as one of the primary obstacles to MSME growth. Of the 200 to 245 million and informal enterprises that need credit but can't avail it, more than 90% are MSMEs. Many of these MSMEs are likely to be Indian, given that India's 51 million MSMEs are facing a credit shortfall of an astonishing $400 billion.

The Indian government has been trying hard to mobilize credit and funding for this critical sector of the nation's economy, but has found conventional and legacy banks to not be up to the task. Today, India's MSMEs and their business owners are finding new-age digital startups and alternate lending platforms to be the most effective institution to disperse credit.

The challenge
India's MSMEs have had their potential curtailed in the past as they had limited access to the finances required to fuel their growth. This is because traditional lenders found it difficult to direct their funds to this sector for a variety of reasons. The two biggest reasons for the financial exclusion of MSMEs were their lack of a comprehensive credit score, and the long-winded and difficult application process to get a loan.

Most MSMEs in India were and continue to be run primarily through cash. Legacy lenders in India use credit ratings to determine a loan applicant's creditworthiness, and most MSMEs would find themselves disqualified for lacking extensive transactional history.

Even those MSMEs that happen to have a good credit score would still find getting a loan daunting due to the extensive documentation requirement, repeated hassle of visiting bank offices, filling up forms, and dealing with the paperwork and long waiting periods. For most banks, MSMEs were a bad customer to lend to because the transaction size would be small, and they perceived the risk to be substantially higher for MSMEs than for larger corporates. Left with no recourse, Indian MSMEs were either resigned to stagnating, or reaching out to unscrupulous moneylenders who imposed punishing interest rates.

Alternate lending platforms to the rescue
Nimble new-age startups saw the existing gap in the market, and evolved a technology-driven solution which has helped India's MSMEs access legitimate credit easily. Today, several MSME founders and owners are leaning on these platforms for credit, with NBFCs already accounting for more than 16% of the credit extended to MSMEs. According to the ICRA, the share of lending by NBFCs to MSMEs is projected to rise to 22-23% by March 2022. Thanks to these startups, the amount of credit being disbursed to MSMEs in India is seeing an increase - even though public sector banks have provided 7% less credit to them between March 2017 and March 2018.

These companies have managed to overcome the credit gap because instead of a bureau and bank account-based credit score, they collect data from other sources and use cutting-edge AI-driven algorithms to create a credit score for applicants. These credit scores are more holistic, provide a more detailed perspective, and are likely to be substantially more accurate than existing credit scores. These new-age lenders have also made great use of regulatory developments such as Aadhaar and India Stack, 

deploying e-KYC to make application and approval a process that is quick and convenient.

The benefits of financial inclusion for India's MSMEs
MSMEs having access to credit through these startups is an extremely important development, especially in the context of how the Indian economy is engaging with the e-commerce opportunity. According to a Morgan Stanley report, India's e-commerce market is set to hit $200 billion by 2026, growing at 30% annually. In large part, this amazing growth is attributed to the greater adoption of technology by consumers in India's tier 2 and tier 3 cities. Further, a BCG report projected that by 2025, these cities will account for 45% of India's consumption. For India's MSMEs, this is a fantastic opportunity for them to grow and capture larger portions of the consumer market. However, to sell effectively to this new customer base, these companies need capital to increase capacity, geographical reach, and make the transition to the world of online commerce.

The UN General Assembly declared June 27th as MSME day in its 74th Plenary to recognize the importance of MSMEs in achieving sustainable development goals, promoting innovation, creativity, and sustainable work for all. With India's alternate lending platforms providing the financial capital needed to help India's MSMEs digitize and get ready for the future, they certainly hold the key to the country's bright economic future.



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