Digital MSME Lending in India

1. Introduction

With the fifth-highest GDP in the world and a thriving business environment, India has one of the fastest-growing economies in the world. 
MSMEs, or the 55 to 60 million micro, small, and medium-sized businesses currently operating in India, are at the center of this landscape.
The contribution of MSMEs to India's GDP is outstanding, but it is approximately 10 percentage points lower than in the US and 23 percentage points lower than in China. Millions of MSMEs need more paperwork to obtain a formal loan. Many need more adequate collateral or have financial information that needs to be more accurate or included. 
A total of INR 45 L Cr ($600 billion) in MSME credit demand is anticipated for 2018. With interest rates at least twice as high as formal credit, informal credit will meet around 40% of that demand.

2. The Evolving MSME Landscape

MSMEs in India are formalizing (becoming businesses with government permits or registrations) and digitizing (adopting digital procedures and practices) at a rapid rate.
The government introduced the Unified Payments Interface (UPI) real-time system for mobile transactions in 2016. This was followed by a demonetization drive that sparked a nationwide shift from a cash-based economy to a digital one.
The government implemented the Goods and Services Tax (GST) a year later to streamline company taxes and boost tax reporting. Millions of MSMEs have already been forced to formalize by the GST proposal. Over 9.2 million MSMEs in India are registered for the GST, an increase of more than 50% from the previous tax system.

MSME Business Challenges

The first was acquiring and keeping clients. Finding new consumers or controlling a decline in demand were the two biggest challenges for one-third of MSMEs.
Finding reasonable credit was the second major problem factor. Long processing periods, a lack of timeline clarity, and insufficient loan quantities were the main problems.

3. The Digital Lending Advantage

The quickness of loan acceptance is one of the most evident benefits.
For better credit underwriting knowledge, digitally accessible data provides a more accurate picture of a borrower's creditworthiness and related risk.
The operating cost effectiveness linked to digital lending schemes is the most significant. Comparing digital lending strategies to traditional ones can result in cost savings of between 30% and 40%. The advantages of formalization and digitalization may become more apparent as digital lending develops, particularly for businesses just starting with credit.

Only government mandates were cited by 50% of those who formalized them.

4. The Need for Segmentation

  • Digital data trail: A digital data trail enables lenders to capture and analyze MSME data efficiently and rapidly.
  • Digital lending demand: Some MSMEs have significant unmet credit needs and a high level of comfort with online lending procedures. Others have minimal demand for digital lending because they feel they need to be more comfortable using technology, don't require credit, or have credit needs already being handled by established banks and NBFCs.

MSME industry types across this matrix and illustrates the four resulting segments: Digital Performers, Digital Emergers, Mainstream Digital Players, and Digital Strugglers.

  • Digital Performers have a solid digital data trail and a high potential demand for digital lending.
  • Digital Emergers have similar lending needs to Digital Performers but have a thinner data trail.
  • Mainstream Digital Players are formal businesses with a low need for digital lending.
  • Digital Strugglers are the most challenging for both digital lenders and banks to serve.

5. Recommendations

  • ACQUISITION: Leverage supply chain ecosystems and e-commerce platforms to improve customer acquisition.
  • ANALYTICS: Embrace next-generation data analytics to manage risk, improve underwriting, and offer more customized loans (e.g., by tenor size).
  • ENGAGEMENT: Design tailored customer journeys to drive adoption and loyalty and improve lending outcomes.
Original Article: chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://media-publications.bcg.com/Credit-Disrupted-Digital-MSME-Lending-in-India.PDF


Location: Mumbai, Maharashtra, India

Comments

Post a Comment

Popular posts from this blog

Sidney Sheldon : Tell Me Your Dreams (Review)

It started on a high note, Someone was stalking her, someone was behind her but Ashley was not able to identify the devil. She was in peril and was scared after that incident. Ashley Patteson, daughter of famous Dr. Steven Patterson, worked for a Computer Graphic company. She never wanted to come to London. But her father forced her to leave her boyfriend and go for higher studies. Later she planned to run away with him but he found dead and castrated on the same night. Nobody knew what had happened to him and who did it to him. Toni and Alette were good friends and used to share a lot with each other. Alette was fond of painting but was very introvert. On the other hand, Toni had a very lovely voice. Alette was in love with Richard whom she met in a store, but he found dead and castrated soon. Toni's boyfriend was not different. The whole scene was very squalid. Ashley got a threat message and she called Deputy Sam Blake but he was not different too. Th...
Read more

Richard Bach : Jonathan Livingston Seagull (Review)

A decent fable, written by Richard Bach, based on the life of a Gull who lived on the shore. The main aim of their life was to collect food for their survival. The story is a message to all those who follow their passion irrespective of what society thinks about them. There is a basic human tendency which complies with Newton's first law that a body remains in the original state unless external force applied. Whenever one tries to do anything new and innovative, people misjudge him and try to demotivate him. This message is beautifully described through the life of a similar Gull who wanted to lead a different life than his flock. The Gull only wanted to fly as every day was the last day of its life. After a lot of practice and hard work, it finally succeeded to attain a record speed. But owing to the tendency of their flock, they ousted the Gull. But as the saying goes, "God helps those who help themselves", the Gull never left its path and worked vigorously for ...
Read more