MSMEs: Roadmap to Realizing the US$ 5 Trillion Economy Dream?

India has set herself the target of becoming a US$ 5 trillion economy by 2025. To achieve this goal, it is essential to strengthen one of the most important pillars of the economy, the Micro, Small and Medium Enterprises (MSMEs).

MSMEs constitute an important sector of the Indian economy. An almost 6.3 crore strong MSME sector plays a crucial role in the development of the country’s economy. Apart from contributing nearly 30% to the GDP, MSMEs today generate employment opportunities for around 11 crore people. 

Shweta Rani

However, the sector itself is facing numerous challenges, inadequate access to credit funding support being one of the top challenges impeding its growth. It is estimated that only about 16% MSMEs enjoy access to credit support, and a vast majority still relying on their personal resources.

A sector that is playing a pivotal role in the country’s development cannot be left to languish to face the challenges emanating from shortage of working capital. It is essential to strengthen the country’s MSME sector, particularly in view of the lofty goal of becoming a US$ 5 trillion economy by 2025.

Last-mile NBFCs can help MSMEs access credit support

Bipin Bachkhati

Improved liquidity and easy access to working capital will be a shot in the arm for a majority of MSMEs. Fortunately, it’s not that difficult and can be achieved through last-mile lenders like the Non-Banking Financial Companies (NBFCs). These NBFCs can be an important bridge between formal credit and this section of customers, comprising many MSMEs that are still new to credit.

According to the Reserve Bank of India, in FY22, the credit to MSMEs by NBFCs grew by 14.6% at around Rs 1.75 lakh crore of credit as compared to 2.8% growth in FY21 when around Rs 1.55 lakh crore worth of credit was extended.

How MSMEs benefit from NBFC support

By providing them with the needed working capital, NBFCs open up a horizon of opportunities for the MSMEs to benefit from. These include – purchasing more stock, availing cash discounts and increasing the margins, improving liquidity, investing for future business expansion, strengthening the relationship with ecommerce brands and distributors/whole sellers, as well as enabling new-to-credit MSMEs to start their credit journeys.

The biggest benefit of MSMEs availing of credit lending from NBFCs, such as LoanTap, is the ability to access specialized or customized lending, as per their unique business needs – a feature which is generally not available with banks and traditional lenders. For example, a small business can tap into an NBFC’s credit support to offer the latest BNPL (Buy Now Pay Later) payment service to its customers, thereby expanding its consumer reach, enhancing cart sizes, and improving conversion rates. 

Leveraging technology to meet unique credit needs 

Creation of customized credit solutions is made possible for the NBFCs through the use of latest technologies such as artificial intelligence and machine learning. These technologies enable NBFCs to capture and analyze consumer data across several parameters. Using deep consumer insights derived from this data analysis, NBFCs are able to create and offer a wide suite of offerings according to the varying needs of the borrowers. These consumer insights are also useful in evaluating the credit worthiness of prospective borrowers, reducing the turnaround time, and improving their risk assessment capabilities to hedge the possible risks. 

Even the new-to-credit MSMEs can accelerate their business growth by accessing loans through alternative digital lending channels that have dynamic underwriting models according to several industries. They can check their credit eligibility digitally with a few clicks, and fulfill the eKYC requirements rather quickly. MSMEs in the erstwhile under-served industries and sectors can also avail of loans at competitive rates, thanks to NBFCs joining banks for co-lending – an arrangement introduced by the Reserve Bank of India in November 2020.

Inching closer to the ‘US$ 5 trillion economy’ dream

By opening alternate lines of credit and driving the financial inclusion of the under- or un-served MSMEs across industries, NBFCs are catalyzing the growth of the MSMEs and the country’s economy. Riding on a strong technology infrastructure – consisting of the account aggregator system, the India stack and DigiLocker – credit access for MSMEs can be further simplified, paving the way for their development and driving India closer to realizing the dream of becoming a US$ 5 trillion economy by 2025.