The Micro, Small, and Medium-Sized Enterprises (MSMEs) in India will be significantly impacted by the surge in digital lending. MSMEs are essential to the Indian economy and make a substantial contribution to job creation and general economic expansion. Over the past few years, MSMEs’ use of Internet payments has increased by 50–100%. According to a Global Findex Report, In India, only 8% of people borrowed money through official sources. Over the past five years, the Reserve Bank of India (RBI) has made great progress since creating a robust framework to oversee digital lending. India’s Fintechs have been able to thrive due to the solid payment structure governed by the government, which has led to an increase in bank account openings—more than 50% of which are attributable to Fintech. Growth of Digital Lending and its Effect on Indian MSMEs: The MSME sector has improved as a result of the RBI’s support for sandboxes to foster innovation in the MSME sector and NITI Aayog’s promotion of digital banking for Indian companies. Statistics show that one of India’s fastest-growing Fintech industries is digital lending. By 2030, the book size of Indian digital lending firms is anticipated to climb from USD 38.2 billion in 2021 to roughly USD 515 billion, with a 33.5% increase in CAGR. Some effects that digital lending has had on Indian MSMEs include the following: Several digital lending software, including Lending Kart, Cash Suvidha, Namaste Credit, and Flexiloans, have found new markets because of digital lending. The post-pandemic atmosphere has also permitted MSMEs to include online lending platforms in their systems to achieve credit standards. The firms were in desperate need of loans made available by the accessibility of digital financing when the demand for MSMEs in India decreased in the years 2020–21. The Indian MSMEs could then build up their resources and utilize the technology. Local and in-person lenders typically only provide loans to MSMEs with the requirement of collateral, which is a cause of concern for MSMEs, particularly those with lower turnovers. To solve this issue and provide loans without collateral, contemporary start-ups have impacted cutting-edge technology like machine learning and artificial intelligence. Without having to contact banks for loans frequently, loan offers can be sent via digital lending software from anywhere in the world to a large number of vendors. The loan process in the digital age significantly improves the effectiveness of MSMEs’ support systems. According to a number of study surveys, 60–80% of Indian MSMEs now sell their products and accept payments online. All Indian MSMEs now need to use technology, whether it be for bookkeeping, digital transactions, or accounting, and the pandemic has accelerated this demand. According to the annual report of the Ministry of MSME for 2020–21, India is home to about 6.33 crore MSMEs, all of which make significant contributions to the GDP, employment, and economy of the nation. It is therefore plausible to predict that MSMEs will, over time, adopt secured technological software to facilitate financial transactions, which will ultimately spur efficiency and advancement in general.
Tag: MSMEs
Are MSMEs receptive to digitalization?
Digitalization has technically taken every domain by storm however, the area of interest for us is the MSME (micro, small, and medium enterprises) market. MSMEs have varied levels of receptivity to digitalization, but there has been a growing trend toward digital adoption in recent years. Many MSMEs have recognized the benefits of digitalization, such as increased efficiency, improved productivity, cost savings and expanded market reach. The level of receptivity to digitalization can depend on factors such as the size of the business, industry and location. Smaller MSMEs may have limited resources to invest in digital technologies or may lack the necessary skills and knowledge to implement them effectively. In addition, some traditional businesses may be resistant to change or may not see the value in adopting new technologies. Nevertheless, there has been a significant increase in digitalization among MSMEs due to the COVID-19 pandemic, which has accelerated the adoption of digital technologies as a means to stay afloat and remain competitive. Governments and industry bodies have also been actively promoting digitalization through various initiatives and incentives, further encouraging MSMEs to embrace digital technologies. Government initiatives Digital MSME Scheme – The government launched the Digital MSME Scheme in 2018 to encourage the adoption of digital technologies among MSMEs. Under this scheme, MSMEs can get access to cloud computing, e-commerce and other digital tools at a subsidized rate. For instance, small businesses under the digital scheme get financial assistance ranging between 15 Lakhs to 1 Crore. Udyog Aadhaar Memorandum (UAM) – The UAM is a one-page registration form that MSMEs can use to register online. This has made it easier for MSMEs to get registered and take advantage of various government schemes and incentives. As of January 17, 2022, 66,34,006 enterprises are registered on the Udyam portal out of which 62,79,858 are Micro (94.6%), 3,19,793 are small and 34,355 are medium enterprises. Technology and Quality Upgradation Support – The government provides financial assistance to MSMEs to upgrade their technology and improve the quality of their products. This support covers areas such as product design, testing and certification. For instance, financial support is given to MSMEs who fall under ZED Certification Scheme (supporting the ‘Make in India’ initiative). Under this scheme, the Government provides upto 80% subsidy to MSMEs. Digital India Program – The Digital India Program is an initiative launched by the government to transform India into a digitally empowered society and knowledge economy. The program has several components that specifically target MSMEs, such as the Common Service Centres (CSCs) that provide digital services to citizens, including MSMEs. Startup India – The Startup India program aims to promote entrepreneurship and innovation in India. The program provides various incentives and support to startups, including MSMEs, to help them grow and scale their businesses using digital technologies. Under this scheme, eligible startups can be exempted from paying income tax for 3 consecutive financial years out of their first 10 years since incorporation. With several schemes, initiatives and incentives put in place, it is safe to say that the MSMEs have been reciprocating well to be brought under the ‘digitized’ realm. With each step taken by the government, financial institutions and businesses, the vision of making India digital-first seem achievable. For businesses, it is about leveraging the schemes and initiatives to remain competitive in the market however, the intention is also serving them with growth through technology!
Micro-lending changing the Rural landscape
The origination of the micro-lending industry in India dates back to the 1980s when India took inspiration from Bangladesh’s successful reforms where they benefitted from distributing loans to the underprivileged women of their region. What began as an experiment, quickly turned into something substantial for India. Today, India’s micro-lending portfolio stands at Rs 2.93 Lakh crore with 6 crore unique borrowers and shows a further growth of 23.5% yearly. With a loan portfolio worth Rs 2.93 lakh crore, the microfinance industry grew by over 16 times in the last 10 years. Majorly served by 202 businesses, roughly over 130 million Indian households, i.e., one-third of the population have access to microfinance as per NABARD’s Status of Microfinance in India report for 2020-2021. Over the years, the success of micro-financing has witnessed a visible shift from banks to NBFCs. According to Sa-Dhan – an association of the Micro-Finance Institutions (MFIs), the NBFC sector is currently dominating with a usage share of 37.53% while banks take a 36.18% slice of the pie, giving away the remainder to other institutions. The total portfolio size of NBFC- MFIs has grown nearly by 7% quarter-on-quarter and amounted to Rs 1,01,678 crore as on September 2022. Inquiring deeper, as per Microfinance Institutions Network, NBFC-MFIs have 22% of their portfolio in urban India and 78% in rural. What has been the micro-lending threat in Rural India Small business owners and merchants, especially ones residing in rural India were often left underserved by the mainstream financial institutions given the high-risk quotient they bring with them. High operational costs coupled with the threat of fraud, defaults and NPAs often left banks in a grey area on how to service the said market. Moreover, Regional Rural Banks (RRBs) that service the rural market often face trouble with inadequate finance since they depend on NABARD to collect finance for their further operation. Given that rural households often have low capital income and hence, collecting deposits to raise funds has been the root cause of this entire fiasco. Rural households largely depend on natural resources like agriculture and other rural economic activities for their survival therefore, natural calamities and other natural menaces play a big role in the success of their business cycle. However, reimagining a way with lower operating and market costs by financial institutions has ensured an improved lifestyle for many rural households. It has further led to the growth of the said sector. Micro-lending changing the landscape Micro-loans are distributed by a range of institutional channels– Scheduled commercial banks (including small finance banks and regional rural banks) Cooperative banks Non-banking financial companies Microfinance institutions However, NBFCs hold a major chunk of this market followed by banks and other micro-finance institutions. A combined amount of Rs 45,830 crore in the form of micro-loans was disbursed in the quarter ending December 2022. Micro-lending institutions are expanding their services by introducing other financial services like insurance, remittance, AePS, etc. while providing training and assistance to the unversed. As for the market leaders; NBFCs have introduced a new technology that enables borrowers to make daily repayments against their loans called Equated Daily Instalments. They have also introduced PoS devices, apps, etc. to allow small businesses to benefit from digital payment methods. Despite a myriad of services already designed for small businesses, financial institutions still have a great scope of work in the said segment. With the MSME sector offering 111 million job opportunities and contributing to close to 30% of the nation’s GDP, there’s still a credit gap of $397 billion; a sizeable opportunity for financial institutions. With the RBI’s new guideline published on March 14, 2022, where they have notched up their support, micro-loans have been defined as collateral-free loans to a household comprising husband, wife and unmarried children and with a yearly income of up to Rs 3 lakh (revised from Rs 2 lakh for urban areas and Rs 1.6 lakh for rural areas earlier). The new rules also lift the price cap on interest rates to ensure that all microlenders are brought on common ground. Where rural households with small businesses struggled to avail basic amenities are today given access to a range of financial services allowing them to attain financial freedom. Micro-lending is changing the rural landscape by offering households the finance they require to build themselves. Although the service is still in its embryonic stage with a wide gap to fill, it can widen its audience range and promote inclusivity in the long run.