Fintechs are helping Indian MSMEs with their biggest challenge — data and the lack of it

• There are over 6.3 crore micro, small and medium enterprises (MSMEs) in India, majority of which are micro and small enterprises.
• Majority of Indian MSME have a turnover of less than ₹40 lakhs, but do not have access to any kind of loan, CEO of Chqbook added.
• The challenges in the assessment of requirement is one of the major reasons why the India MSME have been financially excluded.

There are over 6.3 crore micro, small and medium enterprises (MSMEs) in India and most of them are facing one major problem — access to capital. Whether it is investment opportunities or credit facilities, Indian MSMEs have been largely financially excluded.

Gaurav Shahlot, head of product at Khatabook, in a conversation with Business Insider India, noted that credit has been a challenge for the Indian MSMEs as they need small amounts of capital for a short period of time. “They also needed very, very frequently, whether it's for purchasing an inventory or financing an invoice,” he added.

Vipul Sharma, founder and CEO of Chqbook, noted that a majority of Indian MSMEs have a turnover of less than ₹40 lakhs, which is also the segment that does not have to pay any Goods and Services Tax (GST).

“That segment has done better... The access to credit is definitely a challenge,” he added, saying that less than two crore of the total six crore MSMEs have taken any loan.

Even though the Reserve Bank of India (RBI) has made MSME into a priority lending sector, the lack of data on these small businesses hasn’t been helping. Yet, fintechs and digital businesses have been gearing up to lend to small businesses, who have been left out of the financial system for too long.

Shahlot noted that the intervention of technology has created several touchpoints for MSMEs, making it easier to underwrite loans. He noted that it has also created a lot of different modes of credit lines such as distributor-to-retailer model where retailers are financed on the back of the purchases; Buy-Now-Pay-Later solutions where lenders are financing a purchase by directly paying the supplier and much more.

Just like traditional lenders, even fintechs are facing similar challenges but have devised alternate ways to disburse these loans and credit lines.

But there must be some shortcomings to this as well

“The lenders also face certain challenges because the data and information, which is required for processing the credit lines or pretty facilities, is not easily available… It's not even authenticated. Because the operations [of these MSME] are such small level operations it becomes difficult for them [lenders] also,” Kishor Kharat, former MD and CEO of IDBI Bank and Indian Bank, said.

He noted that the biggest challenge in the MSME lending has been the assessment of requirements. Some of these MSMEs operate on such a small scale that they have not been audited and sometimes it is even difficult to calculate their turnover.

UPI and QR-based payments have made the assessment of turnover and requirement somewhat easier, but a fully computerized operation would be a “dream situation” for assessment of these requirements, Kharat added.

While it is all good, the impact of fintechs is still on the surface. Kharat noted that fintechs are largely serving audiences in urban areas, and the MSMEs in the rural regions have still not been able to reap the benefits of these companies. He believes roughly 5-10% MSMEs must have benefited from the technology intervention.

Loans amounting to ₹3.32 trillion have been sanctioned under the Emergency Credit Line Guarantee Scheme (ECLGS) till April 30, 2022. About ₹2.54 trillion had been disbursed.

“Even though the Reserve Bank of India has stipulated this [MSMEs] under priority sector lending, banks find it difficult to lend to micro and small MSMEs [which makes up for roughly 95% of the industry] whereas medium category people get more credit support,” Kharat noted.

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