Huge growth projected in digital lending to MSMEs
Digital lending to MSMEs in India is projected to increase between 10 and 15 times by 2023, to between `6000 billion and `7000 billion ($80 billion to $100 billion) in annual disbursements, finds a recent study by impact investment firm Omidyar Network and Boston Consulting Group. The study, titled ‘Credit Disrupted: Digital MSME Lending in India’ also says combined with a largely level playing field in India, without dominant incumbents, a range of entrants and business models can be successful in tapping this market.
According to Roopa Kudva, partner and MD, India at Omidyar Network, digital lending has the potential to propel the productivity of India’s MSMEs to global leadership and as of 2018, most of the credit demand of these MSMEs for $600 billion is being met through informal sources. She adds that the report indicates that India stands on the cusp of a watershed moment and can serve as a case study for other nations to elevate the role of MSMEs in the economy.
The report says India’s 60 million MSMEs make an enormous contribution both to India’s employment and its GDP. Yet, they do so at levels far below that of other large nations, lagging 10 percentage points behind the US and 23 points behind China in GDP contribution. The primary reason for this gap is that these businesses often lack access to formal credit sources, which forces nearly 40% of these units to borrow from informal sources and pay interest rates that average 2.5 times higher than rates charged by the formal sector.
DIGITAL LENDING PREFERRED
This scenario is set to change rapidly, says the report, adding while not all types of MSMEs are potential digital lending customers, more than 40% of them are more receptive to digital lending, thanks to 3 major shifts in the country - government policies since 2016, including the UPI launch and the 2017 GST, which led significant numbers of MSMEs to formalize and digitize their businesses; increased market competition since 2015 leading to a dramatic reduction in mobile data cost; and the maturing India Stack, along with API-based data availability, which allows for end-to-end digital MSME lending with loan approval times as short as one day.
The report finds that as MSMEs connect and generate digital data, a majority indicate they are comfortable sharing data digitally; over 60% expect to have significant digital payment streams in the next 3 years. This digital data stream provides lenders with critical information they can use to make appropriate underwriting decisions.
The report says platform partnerships between digital lenders and platform-based businesses, such as eCommerce enterprises, online aggregators and payment providers, can help digital lenders acquire MSMEs transacting business on the platform, as well as provide better underwriting data, and at times, facilitate repayments. Another option is supply-chain partnerships between digital lenders and supply-chain aggregators, which can also help with customer acquisition, provide cash flow data for underwriting, and facilitate loan repayments.
SEVERAL PLUS POINTS
The study highlights that India’s open digital infrastructure, unmet customer demand and leapfrogging digital behavior have the potential to benefit a broad range of players - in sharp contrast to other countries, where an incumbent or ePlatform often dominates. This largely level playing field creates opportunities across industry players (incumbent banks, ePlatforms, and fintechs) and allows for a range of business model approaches.
The study finds that many MSMEs recognize the promise of digital lending and its ability to make their business lives easier. “MSMEs are already growing more comfortable with digital behavior - and, with assistance, this can extend to greater comfort with digital lending. As much as 77% of MSMEs we surveyed said they are comfortable sharing data digitally; 75% with filling out an online application; and 57% with giving lenders access to account statements online .... Notably, fintechs have had particular success reaching new-to-credit (NTC) borrowers... In commercial bureau reporting, the proportion of NTC borrowers is 3 times higher for fintechs versus private banks, NBFCs and public sector banks, highlighting the role that fintechs can play in expanding credit coverage among India’s MSMEs,” the study says.
The report says India’s regulators can further advance the digital MSME lending opportunity by continuing to facilitate data sharing with consent and by instituting incentives for further MSME formalization. These efforts, along with the resulting market innovations, serve as a valuable global case study for other economies.
The study covered more than 1500 MSMEs with annual business revenue between `300,000 and `750 million.