As the world reels under the impact of the global COVID-19 pandemic, India is grappling with the twin crises of limiting the rapid spread of the virus and economic turmoil. The pandemic has hit all sectors of the economy, with the country’s micro, small and medium-sized enterprises (MSMEs) being the most affected.
In 2019, MSMEs contributed about 29% to India’s GDP, and the government had ambitious plans to increase the sector’s contribution to 50% in the coming years.. While MSMEs were seen as the engines of growth in the Indian economy, the pandemic and the resulting shutdown of economic activities sparked panic across the country.
Lack of revenue generation, labor migration and health and safety compliance have further increased the risk of business extinction. Moreover, the lack of access to finance, due to the reduced lending capacity of banks, has compounded the woes of MSMEs.
The potential of digital lending for reviving MSMEs
The government has announced several measures to support the revival of the MSME sector. In May, Finance Minister Nirmala Sitharaman announced six COVID-19 relief measures to make MSMEs “aatmanirbhar” (self-reliant).
The government has also regulated banks to support the sector with programs for struggling MSMEs, such as the Emergency Credit Line Guarantee (ECLG). While the government has mandated public and private sector banks to offer assistance, the volume of monetary support needed to pull businesses out of the crisis is enormous. The entire credit and financial ecosystem must support MSMEs with agile credit solutions for macro-economic impact.
In the current situation, digital lending by fintech players can significantly benefit MSMEs to emerge from the crisis and contribute to India’s economic recovery due to COVID-19. Line of credit will help MSMEs access capital quickly, especially as funding rounds have been disrupted either by supply chain disruptions, labor issues or adverse cash flow during the nationwide lockdown.
In addition, the ease of access to a loan with an accelerated process, Iincluding hassle-free eKYC and fast document verification, can play a key role in starting cash-strapped businesses.
The right time for MSMEs to go digital
To unlock the full potential of digital lending, MSMEs often need a strong digital footprint as a criterion for accessing finance from fintech lenders. However, of the 75 million MSMEs based in India, only 16-18 million have a digital presence, which includes social media, an online list, or a website.
Moreover, the The Reserve Bank of India has called for full digitalization, including payments for MSMEs, thus accelerating digital adoption for those who have not yet done so. With a digital presence, MSMEs can obtain a more formal financial record, giving them access to broader financial services. Many fintech players also support MSMEs offline by creating an online identity with their business page as well as innovative customized solutions.
Fintech also offers point-of-sale transaction-based lending models, banking and fintech partnership models, bill discounting exchanges, marketplaces, captive models, and P2P models that can boost recovery. MSMEs.
With technology and innovation at the core of fintech existence, they can improve the lending ecosystem for MSMEs by leveraging AI and ML solutions to underwrite the risk of providing credit services and financial resources to people that banks will not provide. Traditionally, credit bureau scores have been used as a benchmark for credit history and repayment behavior.
A thin file or no file usually makes it difficult for the borrower to seek loan approvals. Thanks to these new generation technological tools, digital lenders can verify data more efficiently with more verification lanes. This will dip financial inclusion and accelerate remittances to MSMEs in all geographies beyond metropolitan cities and profiles.
Reviving the MSME industry has the potential to support citizens, boost employment and contribute to the economy. According to the Sixth Economic Census released by the Ministry of Statistics and Program Implementation in 2018, women make up around 14% of the total entrepreneur base in India.
In addition, 10.8% of total disbursements from 17,000 MSMEs assessed FY19-20 targeted businesses run by women as sole proprietors, partners or directors.
Therefore, digital loans to MSMEs — especially first-generation entrepreneurs and women – through alternative platforms is the need of the hour as they are deprived of opportunity due to lack of credit.
the The COVID-19 crisis should also be seen as an opportunity for MSMEs to adopt a digital presence to facilitate financial support, business growth and social upliftment, today and tomorrow.