Credit Gap : Technology to unlock Capital Source

Credit Gap MSME:

The Micro, Small, and Medium Enterprises (MSME) sector is the largest business sector in India, contributing more than 30% to the GDP, and are responsible for 50% of the country’s total exports. With 95% of the business entities being MSMEs and generating many employment opportunities and also accountable for one-third of India’s manufacturing output. The robust MSME Sector plays a major role in boosting economic growth and delivering more inclusive globalization. It has the ability and capacity to bounce back the economy after this pandemic. Their significance cannot be overstated, yet access to credit remains a problem. MSMEs cannot easily tap into the credit market, which hampers their vision and growth. The government has taken steps in the right direction, but the gap is only increasing. According to the Association of Chartered Certified Accountants (ACCA) report, close to five crores, MSMEs lack access to dependable credit.

MSME sector overview, Contribution to GDP, Exports and NPA

Source: MSME Annual report, Transunion CIBIL MSME report

According to the World Bank, the credit gap has increased exponentially in the last five years and is now worth almost $380 billion. These are alarming numbers, and most of them stem from the lack of trust traditional institutions have in MSMEs. With the addressable credit demand of Rs 37 trillion and the existing mainstream supply of Rs 14.5 trillion, MSMEs face a credit gap of Rs 20-25 trillion.

As per the ET Magazine Survey, many MSMEs recover more than half their receivables after more than 90 days. About 17% of MSMEs write off one-fifth of their debt every year. This highlights the need to create an inclusive financing environment for all firms.

Reasons for this Credit gap:

MSMEs are less likely to be able to obtain bank loans than large firms, instead, they rely on internal funds, cash from friends and family to expand their business. There is less access to get formal credit with banks, NBFCs, and other financial institutes. Why does this gap exist? Because traditional banks and NBFCs consider MSMEs a risky lending proposition. Many Indian MSMEs don't maintain a consolidated record of their financial data such as transactions, income tax return filings, and P&L. With institutional lenders having little to no visibility into MSME finances, their underwriting mechanisms fail to accurately gauge the creditworthiness of potential borrowers. Moreover, since small businesses often don't own substantial physical assets, traditional BFSIplayers are unable to offset the risk to capital and end up rejecting most MSME loan requests.

Excessive documentation requirements, as well as the time taken for the loan to finally be approved under the conventional loan application process, also put a lot of prospective MSME borrowers off. Most micro, small, and medium businesses operate as part of a forward supply chain; products and services are delivered immediately, with the payment taking anywhere between 30 and 90 days to be cleared. Such businesses don't have a large capital corpus, to begin with, and operate on excellent financial margins, making it necessary for them to have immediate and urgent access to working capital to meet their day-to-day expenses, such as paying staff salaries, suppliers, and utility bills. Conventional working capital loans can take up to several weeks to approve and disburse, making them unsuitable for MSME working capital requirements.

The larger part of the credit gap will have to be solved through structural, market-led solutions. Fintech startups are largely enabling credit on three fronts: digital distribution engine, creating alternate data sets for underwriting and lending/co-lending along with traditional lending partners . These fintechs are using tech to remove the inefficiencies in the market making access to credit faster, economical and contextual for the MSMEs. Lot of emerging online lending platforms have leveraged alternate data & AI to underwrite and lend to the MSMEs.

Some companies adopted approach of anchor eco system (brands and manufacturers) which comes with multiple integrations (ERP/Accounting/GST) and have deeper access to the data which is usually not available to banks on real time or otherwise.

Continued innovations in the Buy Now Pay Later(BNPL) model are further providing lot of embedded financing options for MSMEs.


We believe that embedded finance infrastructure and solutions with deeper integration within the MSME ecosystem are going to create the next big wave in the SME lending space. Thus, creating a paradigm shift in the MSME lending space from rigid, asset-based financing to cash-flow/transaction-based customized/contextualized financing solutions.