FinTech Drives 31% Growth in MSME Loan Disbursements

In recent years, we have seen a riveting evolution of digitisation take form across the lending landscape in India.

This spike can be largely attributed to the rising internet penetration and smartphone usage—not to mention a favourable regulatory environment.

Reports also confirm that the loan portfolio of India’s Micro, Small, and Medium Enterprises (MSMEs) has seen a 17.8% jump, rising to INR 64.1 trillion by March 2024, compared to the same period in 2023.

Add to that—there are projections of digital lending reaching INR 47.4 lakh crore ($568 Bn) by 2026. This presents a massive opportunity to expand the tech-driven financing options for MSMEs and push traditional lending players to further diversify and strengthen their capabilities in borrower outreach and credit assessment.

With economic reforms, forward-thinking policies, and digital advancements on the horizon, let's take a look at the FinTech trends, strategies, and government efforts that will shape the future of MSME lending in 2025 and beyond.

Charting the Surge in Digital Lending: What the Numbers Reveal

EY reports a growing credit gap for MSMEs, estimated at US$250 to 300 billion. The good news is that MSMEs are increasingly receptive to digital lending, with loan disbursements up 31%. By 2030, digital lending is expected to surpass traditional lending for unsecured loans.

MSMEs contribute to grassroots wealth creation and are critical to meeting the $2 trillion export target by 2030. As a result, the financial services sector must work more closely with the government to address MSME funding.

By 2025, the combined strengths of banks, NBFCs, and FinTechs will be essential in providing affordable, accessible credit to MSMEs.

Rising Borrowing Costs and Their Impact on FinTech Lenders

Despite their importance in driving India’s economy, nearly 80% of MSMEs lack access to traditional bank loans, forcing them to turn to informal or private lenders at higher costs.

FinTechs offer easy access to finance and contactless payment methods, helping MSMEs streamline record-keeping and reduce overhead. However, FinTechs that rely on external funding face pressure from higher financing costs. Without access to low-cost deposits like banks, they struggle to maintain profitability.

Many FinTechs offer collateral-free loans and use alternative data for credit assessment, opening new avenues for small businesses. Leveraging AI and machine learning for sharper risk assessments will allow FinTechs to offer contextual loan products, lowering operational expenses and expanding credit access.

How Economic Downturns Are Shaping Digital Lending Risks

Economic downturns pose challenges for digital lending, particularly for low-income borrowers. As credit penetration expands, economic growth, urbanisation, and advances in Digital Public Infrastructure (DPI) will drive demand, but rising unemployment and declining disposable income could lead to more loan defaults.

Most FinTechs are involved in high-risk lending, catering to small businesses, which are considered high-risk assets. To handle large volumes of data while ensuring integrity, lenders need advanced technology stacks.

During downturns, FinTechs offering micro loans with pay-as-you-use models can reduce default risks. Digitally forward lenders are personalising underwriting by using alternative data and DPI-enabled capabilities for better credit decisions. With AI, FinTechs can optimise customer service, enhance debt collection, and mitigate risks, improving overall loan accuracy and efficiency.

Breaking Down India’s Digital Lending Rules for MSMEs

India’s lending landscape has seen significant changes, focusing more on transparency, borrower protection, and financial inclusion. The government has proposed stricter measures against unregulated lending, with penalties including up to 10 years in prison for non-compliant loan apps.

The RBI’s Digital Lending Guidelines emphasize transparency and borrower protection. The new rules require digital lenders to provide clear upfront information about loan terms, interest rates, and fees, making it easier for borrowers to understand costs.

The RBI Innovation Hub is also advancing the Unified Lending Interface (ULI), enabling fast, secure transactions by connecting FinTechs and account aggregators. This digital approach fosters more accurate credit assessments and greater access to financial products.

The New MSME Lending Landscape in 2024

Over the years, regulatory bodies have started to expect financial institutions to submit more granular data while new data elements are being added frequently. 20% of the data elements are either changed or redefined every year. Looking ahead to 2025 and beyond, digital lenders need to develop a comprehensive risk data model that acts as a single source of truth for all downstream risk use cases. 

Additionally, FinTechs that offer flexible capital solutions in terms of structure and longer loan tenures will be able to match up to the cash flow profiles of MSMEs. Drawing on DPI and data from various sources like digital wallets and tax portals for risk assessment will broaden the possibilities and addressability of the credit market. This will further accelerate credit delivery and better meet the growing financing needs of MSMEs in the coming years.

Author: Mr. Ram Kewalramani- Co-founder & MD, CredAble