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Financing MSMEs loans in 2022: Challenges & Opportunities

by Sonal Shukla

MSMEs are crucial to India’s equitable socioeconomic development. The industry accounts for more than 30% of India’s GDP and nearly 48% of exports while also playing an important role in job creation, particularly in semi-urban and rural areas. As a result, the success of this sector is critical to India’s long-term economic development. However, the industry’s full potential has been hampered by a lack of timely, low-cost formal financing, as cash-strapped small enterprises struggle to invest in technology, upskill their workforces, and modernise infrastructure. The COVID-19 pandemic has aggravated the situation, which has generated a global economic crisis.

Instruments of Financing and the Lending Ecosystem

MSMEs require immediate access to operating cash, but obtaining a MSME loan from historically risk-averse lenders such as banks and NBFCs is becoming increasingly challenging as lenders seek to reduce the risk of nonpayment. Banks often need MSMEs to provide adequate collateral, which may be difficult to secure, particularly for first-time businesses, due to a lack of sufficient credit history and legal papers. This has impacted the availability of low-cost loans to small firms. As opposed to asset-based credit, cash flow-based lending may assist improve credit flow since lenders under this model provide MSME loans based on predicted future cash flows rather than firm assets.

MSMEs can also profit from a financial environment that promotes quick cash availability and general business ease. Policy changes are required to build financial infrastructure improvements. The Open Credit Enablement Network (OCEN) protocol, for example, was designed to “democratise credit.” It is a collection of APIs that will connect lenders such as banks and NBFCs to marketplaces, allowing them to make low-interest loans to MSMEs online. OCEN is a credit rail designed to digitise India’s credit infrastructure, standardise the loan application process, and make it faster and less cumbersome. It will provide lenders with a standardised method for offering small-ticket loans.

Traditional banks, in collaboration with competent fintech partners, may employ cash flow-based lending to lend to MSMEs while reducing the risk of NPAs. Another unique project aimed at improving the MSME loans market is GeM Sahay. A government e-marketplace platform that allows MSME loan service providers (LSPs) to provide low-cost finance to small enterprises is one of OCEN’s experimental initiatives.

Following the COVID-19 pandemic, digitalisation was critical for ensuring business continuity and recovery, as well as strengthening resilience and competitiveness in the post-pandemic environment. Because of the epidemic, there is a heightened need for frictionless, secure, and accessible services from everywhere. As a result, small businesses must reconsider their marketing approach and embrace digital change. Many conventional retailers, for example, have created websites or apps or have established themselves on online marketplaces that accept digital payments. MSMEs can reach a broader audience and provide them with the most comfortable end-to-end online shopping experience possible by getting online. A website may also assist small firms in establishing a digital footprint, which increases formal credit accessibility.

By automating and simplifying numerous company tasks, technology may help MSMEs enhance their operating efficiency. Cloud services, CRM, accounting, and ERP systems, for example, can deliver faster and better results at a lesser cost. To ensure future success, MSMEs must expand their technical skills. They must educate their employees on cutting-edge technologies such as big data analytics, AI, machine learning, IoT, and others. More centralised help driven by governmental changes is essential to increase MSME digital literacy.

Banks and non-bank financial companies (NBFCs) offers for MSMEs

The recently adopted Co-Lending Model (CLM) allows banks to work with regulated NBFCs and HFCs to fund neglected MSMEs. This concept has the potential to benefit everyone involved. If NBFCs serve as the primary point of contact for borrowers, banks may benefit from their larger reach, operational knowledge, and technical skills, which enable a better last-mile connection. As a result, banks may be able to serve a broader spectrum of consumers while incurring lower operational expenses. NBFCs, on the other hand, may seek liquidity and financial assistance from larger banks in the event of a liquidity crisis.

Through digital lending, credit disbursement processes may be made faster, safer, and more convenient for borrowers, who are increasingly preferring contactless services. Lenders can offer digital customer service interfaces that allow small companies to be served remotely, even in remote areas, while lowering operating costs. Technology also enables digital lenders to analyse potential borrowers’ credit risks by analysing consumer data from other sources, such as their internet activities.

This is especially advantageous for thin-file borrowers since it enables lenders to rely on less official information and assess creditworthiness more swiftly and precisely. Lenders can build a more comprehensive credit risk profile, identify and prevent fraud, and reduce NPA risks by leveraging the power of AI, ML, Big Data analytics, and other game-changing advancements. A stronger risk management framework may help both lenders and borrowers by allowing for more insight-driven, timely loan underwriting decisions.

Summing up

MSME growth and sustainability are important for the country’s long-term prosperity; as a result, the Government of India is working to accelerate MSME growth by establishing a variety of programmes in this sector. MSME importance in economic growth can be seen all across the world, as nations with growing SMEs outperform those without. As a developing country, India places high importance on MSME in terms of long-term economic growth. India has a significant number of micro, small, and medium-sized businesses (MSMEs). According to the Ministry of MSME’s annual report, India has 6,08,41,245 MSMEs that contribute to poverty reduction, job creation, and rural development.


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