Rise of the MSMEs in India

MSMEs (Micro, Small and Medium Enterprises) form the backbone of any national economy, yet they are often underserved by conventional commercial banks that tend to perceive MSMEs as low value, high risk accounts. 

As a segment, MSMEs are largely fragmented, geographically dispersed, lumbered by complex tax regimes and often lacking in formalised financial discipline. These unique characteristics make servicing them a challenge for banks, which often translates into sub-optimally priced, poorly designed and poorly targeted financial products for MSMEs. This leads to a chicken and egg situation where poorly designed products increase the risk of defaults in turn further distorting the perceived riskiness of this section within banks. The net impact of all this is to severely distort borrowing options for MSMEs despite their vital importance to the health of the economy. 

Yet this situation is not unsolvable. While the challenges of servicing MSMEs are very real - non-standard credit assessment, lack of a universal credit scoring system, non-adequate collateral - solving creatively for these problems can lead to breakthrough product innovation.

In the last one decade, we have seen an emergence of Fintechs globally in payments, point of sale (POS) products, cross border remittances, retail/personal lending. This revolution is now increasingly spilling over into the MSME sector with a number of MSME-first providers emerging to disrupt conventional banks. I am thinking of providers like Oak North, The Funding Circle and Kabbage which have become the first port of calls amongst MSMEs.

It's about time we see a Fintech disrupting the MSME space in India, taking ownership of individual problems plaguing the segment and offering solutions that creatively solve for them. 

More about the disruption in the MSME space in my next article. Stay tuned !