The challenges in MSME finance requirement

There are a total of 56 million MSME, out of which 12 million are in manufacturing and 44 million in services sector. 14% of MSME are registered while rest are unregistered.

14% led by women, mainly in rural areas. It contributes 31% to GDP and 45% to exports. The sector faces challenges due to inadequate and timely finance access. Financial institutions are cautious due to small loan sizes and collateral limitations.

The overall demand for both debt and equity finance by MSMEs is estimated to be INR 87.7 trillion (USD 1.4 trillion), which comprises INR 69.3 trillion (USD 1.1 trillion) of debt demand and INR 18.4 trillion (USD 283 billion) of equity demand. About 53% is the viable debt demand.

Informal sources provide 84% of MSME financing (INR 58.4 trillion), while formal sources contribute 16% (INR 10.9 trillion). Scheduled commercial banks offer the majority, 81%. Informal sources include family, friends, and moneylenders, while formal ones include banks and financial institutions.

The MSME sector faces a credit gap of INR 25.8 trillion ($397 billion), with micro and small enterprises comprising 95% of this gap, presenting opportunities for formal financial institutions to address. Medium enterprises appear well-financed. With interventions and support, the sector's excluded demand can become financially viable. Low income and Northeastern states make up 24.2% of the credit gap. Low-income states have a gap of INR 5.9 trillion (USD 90.6 billion), with West Bengal accounting for 30% of this. Limited bank access and risk aversion are challenges.

Low banking penetration in Low-Income and Northeastern states hinders MSME credit access, particularly in manufacturing. The study identifies three key pillars for MSME finance growth: legal and regulatory framework, government support, and financial infrastructure. Supportive policies and innovation incentives can enhance financial service access for MSMEs.

Government and financial sector efforts to support MSME finance include initiatives like the MSME Bill, PSL norms, and Insolvency Code. To further improve access, potential interventions include strengthening supporting infrastructure, enhancing credit appraisal processes, and exploring collaborations with fintech firms.

NPAs impact MSEs negatively as lenders often assume willful default, hampering revival efforts. Distinction between willful defaulters and non-cooperative borrowers is crucial. SARFAESI enables asset recovery upon default.

MSME portfolio has lower NPA rates (around 10.5%) compared to large corporate segments (16.7%). Smaller credit exposures have lower NPAs (approximately 8%).

The constraints faced in supplying adequate credit to MSME sector include –

? High transaction cost

? Low risk appetite

? Outdated underwriting process

? Lack of product innovation

SIDBI recognized a need for technology-enabled credit access in clusters. They launched a platform for 15 clusters, offering tailored policy and tech recommendations. For example, the Kolhapur textile cluster benefited by consolidating units and receiving increased subsidies.

Alternative lending models in India, driven by fintech, are disrupting traditional MSME lending. The financial crisis and digital initiatives like Digital India have created an opportunity to serve entrepreneurs who prefer formal credit. E-commerce growth further fuels the need for accessible credit. With a significant portion of the population excluded from formal banking, there's a demand for easy and swift formal credit channels. Alternative lending models are on the rise, outpacing traditional banks, especially in the period between 2006 and 2013. As India's e-commerce market is set to reach USD 100 billion by 2020, catering to smaller sellers and lenders through digital platforms becomes crucial. With millions of new internet users each month and widespread mobile usage, adapting lending models for the digital ecosystem is essential.

Benefits of MSME Fintech lending include –

? Unsecured loan products

? Comfort with higher risk profile

? Alternative credit risk assessment methods

? Low regulatory obligations

? Minimal operational requirements

Balance sheet lenders, unlike marketplace lenders, directly lend from their capital, often as an NBFC. In India, Capital Float stands out, offering SME loans quickly, leveraging its equity and loans from banks.

Hybrid lenders combine marketplace and balance sheet lending, providing flexible credit options. They algorithmically assess borrower creditworthiness, then either lend directly or match with lenders. This model addresses payment delays for MSMEs, with plans for growth in India. Invoice lending is a common application, facilitating upfront working capital based on verified invoices. Successful repayment improves credit terms, while the buyer's credit rating affects the supplier's loan rate.

Supply chain finance provides short-term working capital to offset payment delays, typically initiated by larger buyers. Digitization and end-to-end digital platforms are expected to become standard in this field. Entities like KredX and RXIL facilitate early payments for MSMEs based on buyers' credit ratings, addressing delayed payment issues. The digitization of supply chain finance is a recent development, aiming to bring transparency to the ecosystem.

As one of the world's largest fintech ecosystems, China's rise to global digital finance dominance was led by technology giants who took advantage of recent regulatory changes. Realizing that the traditional

banking sector was not meeting the needs of consumers and SMEs, the government established private banks. Companies such as Baidu, Alibaba, and Tencent expanded their mobile wallet and lending practices under this private bank framework; Alibaba led the way through its financial arm, Ant Financial, in providing working capital loans to SMEs online

The MSME sector in India faces financing challenges despite government support. Recent interventions include insolvency laws, rehabilitation frameworks, and IT platforms for trade receivables. Ongoing challenges include human capital development at financial institutions, expanding credit information, and promoting movable asset-based lending. Additional interventions are needed to effectively meet MSME credit demands and improve financial inclusion, focusing on staff recruitment, training, and accountability.