How to Leverage Fintech Credit for MSME's Rapid Growth

An article by Anuj Pandey, Chief Risk Officer, U GRO Capital for SMEStreet

There are approximately 6.3 Cr MSMEs in India, contributing to around 30% of the country’s GDP. They employ more than 11 Cr people. It is one of the most dynamic sectors and contributes significantly to the social & economic development of the country. 

Yet, MSMEs continue to struggle for survival & growth owing to delayed payments and the ever-increasing credit gap. This article is an attempt to give practical suggestions on how MSMEs can better leverage formal credit which can fuel their growth.

Traditional financiers find it difficult to assess the creditworthiness of MSMEs because of a lack of structured information and collateral which can be given against the loan. New age Fintechs are now emerging which are helping to solve this credit gap problem of MSMEs by smartly using technology and data science-based approaches. These digital lenders can offer customized solutions to MSMEs with considerably less turnaround time and overall logistical convenience through intelligent automated processes.

Mentioned ahead are a few salient points which MSMEs should consider to better avail this opportunity.

Have a credit history

A credit history report is a record of past & current debts. This includes the repayment history. All lenders check this report before making the final decision on sanctioning or rejecting a loan application.  

It’s important for MSMEs to have a formal credit history. Traditionally they have been borrowing from informal sources which at times results in very high-interest rates, exploitation by local money lenders and eventually can result in a debt trap. Also, informal borrowing does not get recorded in any credit report.

MSMEs are encouraged to borrow from regulated formal institutions. This will help them record credit history and safeguard them from any exploitation later. They can start with a small amount of formal borrowing and once credit history is established, go for a larger amount.

Repayment discipline is Key

Timely repayment of loans is the most important component which impacts the credit history score. Leverage (amount of debt taken vis a vis the revenue) is also a very significant factor.

MSMEs need to be prudent while taking a loan. They should take only what is critical for running the business. Excessive unnecessary borrowing can lead to a debt trap which is very difficult to come out from. At times, small business owners get tempted to take business loans from personal use. This should be avoided. 

Today, lenders can not only monitor credit history report on a real-time basis but can also check end use of funds through digital means. MSMEs with better repayment behaviour and discipline are likely to have an advantage over long terms. They would be preferred by all financiers.

Perform a digital transformation

MSMEs need to think and act digitally. Most empirical studies show that small businesses with increased digitalization have seen better customer connect, improved productivities, cost optimization and increase in profits in the longer run.

Recent government initiative on “Udyam” registration is a critical first step towards digital transformation. With this registration, MSMEs will become a part of a large digital ecosystem. Access to various Government schemes & subsidies, opportunity to participate in marketplaces & international fairs, among others, will become very easy for them. 

Having an internet banking account and also a digital payment gateway will considerably improve operational efficiency by leaps and bounds. Today 24 hours digital payment solutions are available which are very cost effective and convenient.

Covid-19 pandemic has already shown that businesses who could transform themselves digitally in time have not only survived but also grown substantially through connect to a wider customer audience and faster product/solution implementation.

To be successful, MSMEs should change their mindset and adopt digital business models as far as possible. This would require learning about new digital infrastructure and applying the same to their own businesses. This will increase operational efficiencies and also allow access to LSPs (Loan service providers) which will open up big market for them. The quicker they change, better are their chances to survive and thrive in this increasing digital environment.