Ananya Chand, Brand & Marketing Manager
India’s Micro, Small & Medium Enterprises (MSME) sector is over six crores strong, of which more than 98% of enterprises fall in the micro segment forming the bedrock of the country’s services & manufacturing sector and contributing to almost 30% of India’s GDP.
When compared with some of the developed and other MSME-centric developing countries, it is often observed that unlike Indian MSME’s growth curve which peaks at micro enterprises, the more developed nations have ensured almost equitable growth of their micro and small enterprises, with the sector showing a smoother incline at small enterprises.
The problem of a crowded micro-enterprise space in India speaks volumes about interventions that are urgently required to focus on challenges that are stymying the growth of the sector; informality of the sector being of paramount concern. Naturally, it is also important to throw the limelight on requisite policy interventions to encourage benefits of formality that overshadow the overall costs to micro entrepreneurs and incentivize them to switch from informal to formal sector. Let’s understand the challenges that the sector is plagued with, primarily due to its informal nature.
The MSME sector which employs more than 100 million people in India with over 80% of them in the unorganized fold, has many daunting challenges among which are, finding trusted & affordable means of customer acquisition, hiring skilled workers and facing productivity losses due to lack of awareness of business automation services. But the most critical of them that takes centerstage is access to growth capital. India is perhaps the only country among developing countries with high MSME concentration, where the sector’s exposure to formal financing channels has historically been the lowest (less than 4%) and unfortunately is still a conundrum for most lenders.
With MSME sector clearly emerging as India’s favorite poster boy, expected to herald the next wave of economic growth, time is ripe for interventions in critical areas like access to credit through formal financing channels. The informality of the sector and lack of assessable data can no more be an excuse to ignore it. Strategies formulated today to further unprecedented amount of growth capital to this sector, without compromising on risk parameters, will go a long way in contributing to the country’s vision of being a major player in domestic and global supply chains. And the foundation for this can be laid by introducing a fresh perspective to financial underwriting which adds to the financial services industry’s traditional approach of relying on demographic and bureau data.
Penetration of smartphone & data at their historic best in India, progressive programs furthered beyond Tier-6 cities with Digital India initiative, availability of IndiaStack and digitization of neighborhood retailers, adequately support the role of Alternate Lending models which have been developing rapidly in the B2C segment and can be leveraged for the B2B segment, especially the small & micro enterprises. To this effect, triangulation of data generated everyday by the MSME sector not in the purview of traditional underwriting like location, digital transactions & payments, asset ownership, social media scores, psychometric profiles etc. need to be explored. Leveraging these data points effectively to create alternate credit scores, as evidenced amply in the retail lending space, have led to accurate risk assessment of thin-filed customers and can be extrapolated for use cases in the micro and small enterprise segment. For instance, India’s demand in top 3 retail credit segments for 2-wheelers, personal loans and home loans have seen as high as ~70% new-to-credit customers, signaling a huge pent-up demand that alternate data is unlocking in the B2C segment. Further strengthening the case of alternate data are “aggregator of aggregator” models like Sahmati, a platform which will be supported by new-age NBFCs created by the RBI under the account aggregator (NBFC-AA) model. These are entities that function as an account aggregator, providing information on various accounts held by a customer in different financial intermediaries so that customers don’t have to physically arrange for the aggregate level information from multiple sources required to say apply for credit with consent rights available to the customer.
It is highly likely that the trend will be mimicked in the micro and small enterprise segment too. Simple application process, fast turnaround and flexible loans for the segment can be a reality as early as today if we collectively realize that technology is the new backbone of MSMEs who want to succeed in the post-COVID world. Digitization and analyzing data-trails is no longer optional; it has become a critical need in a scenario where physical interactions will continue to be extremely limited and remote access to everything the order of the day.
Interestingly, aggregators and platforms that cater to the MSME segment are well-poised to ride this wave, armed with relevant data points resulting from new digital interactions and traditional data. An accelerated pace of digitalization and progressive policies to support marketplaces building digital-trust ecosystems and promoting complaint MSMEs in the domestic market as well as globally, is of paramount importance. These platforms will be a crucial to ensuring that the micro & small segment MSMEs are brought into the formal fold with relevant data analysis and rich credit scores that reinforce their identities, risk profiles and fast-track their growth with adequate capital and structural support.