A Closer Look at On-Ground Reality of MSME Lending Space

The MSME sector contributes about 30% to the GDP and employs over 11 crore people. Despite this significant impact, nearly 90% of MSMEs face challenges in accessing formal credit. According to a recent report by the Reserve Bank of India , the credit gap for MSMEs stands at a staggering ?25 trillion. This data underscores the critical need for efficient lending processes to support the backbone of the economy.

The journey through MSME onboarding is complex and fraught with hurdles. Let’s explore the steps involved and the challenges faced in the MSME lending landscape in India.

Step 1: Application Creation by Banks’ Account Managers (AMs)

Banks’ Account Managers initiate the process by creating applications within their systems. The real challenge lies in meticulously scanning and organizing all required documents under the client ID. Limited collateral availability becomes a significant obstacle, often leading to delays and additional efforts to secure loans. This step underscores the necessity for a streamlined documentation process to expedite application creation and approval.

Step 2: Scrutiny by Credit Processing Associates (CPAs)

Credit Processing Associates then review each document in detail, flagging any discrepancies. This manual process often leads to delays and errors, adding to the complexity of the onboarding journey. Limited credit history and poor documentation further exacerbate these challenges, making it difficult for MSMEs to establish credibility with lenders. Addressing these issues requires a robust system for document verification and error reduction.

Step 3: Quick Data Entry (QDE) and Underwriting

Relationship Managers take over for quick data entry, followed by underwriters who meticulously review the application. The tight turnaround time and manual processes leave little room for error, intensifying the pressure. High-interest rates and stringent documentation requirements further burden MSMEs, making it challenging to access affordable financing options. Streamlining data entry and underwriting through automation can significantly reduce errors and enhance efficiency.

Step 4: Decision Making by Local Credit Committees

Local credit committees convene to make final decisions, weighing risks and policy departures. The evaluation process can be time-consuming, resulting in bottlenecks that hinder progress. Lack of awareness about financing alternatives and limited access to credit further compound the challenges, restricting MSMEs’ ability to grow and expand their businesses. Enhancing decision-making processes through better data analytics and faster evaluation methods is crucial.

Step 5: Post-Disbursement Documentation and Operational Challenges

Post-disbursement, legal documents are signed, and operations desks swing into action, working through standard operating procedures. However, this leaves little flexibility and often leads to delays, adding to the frustration. High-interest rates and lack of collateral continue to pose challenges for MSMEs, impacting their ability to repay loans and access future financing. Streamlining post-disbursement processes and offering flexible repayment options can alleviate these issues.

Step 6: Disbursement and TAT Pressures

Despite approval, disbursing loans within the MSME Turnaround Time (TAT) poses significant challenges. Approved but not disbursed cases result in substantial credit effort loss, compounding the hurdles. Ensuring timely disbursement and minimizing TAT pressures through efficient processing systems is essential to support MSMEs effectively.

Addressing these challenges requires a multi-faceted approach, from improving access to credit and simplifying documentation processes to raising awareness about financing alternatives. Supporting MSMEs in overcoming these hurdles is crucial for unlocking their full potential and driving economic growth.

Join us for a webinar on June 11th to explore the transformative potential of automation in MSME lending. Discover how automation can streamline processes, enhance decision-making, and unlock new possibilities in the MSME sector.

Register Now@ https://shorturl.at/89EcX