Huge growth pro­jected in dig­i­tal lend­ing to MSMEs

Banking Frontiers - - Research Notes - Mo­[email protected]­ingfron­

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.


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.


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.

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