In a developing country like India, Micro, Small and Medium Enterprises (MSME) are the key factors responsible for the growth. As the banks of the country have not paid much heed to this finance service, MSMEs are still to settle its ground here. As MSMEs are struggling in India, it has become a much bigger thing in other developed countries. With adequate capital and other financial assistance, the MSME Finance Service Providers have become the next big thing to look for.
On a global platform, the growth in online MSME finance market has grown by 45 % and billions have been invested in online MSME startups. There are future prospects of MSMEs in India as the generation next has evolved from a regular job to venturing into startups but there are many barriers that need to be removed from the financial sector.
Requirements of MSME Finance service providers in India
A whopping amount of 46,426 billion, will be the credit requirement of India’s micro, small and medium enterprises by the year 2020. This demand will be fuelled by increasing number of entrepreneurs and the flourishing startup ecosystem in India.
After the initial hiccups of demonetization and GST roll out, India is gearing up to move to a higher growth trajectory and the Micro, Small and Medium Enterprises (MSMEs) sector assumes a pivotal role in driving this growth engine. According to the estimates of the Ministry of MSME, Government of India, the sector generates around 100 million jobs through over 46 million units situated throughout the geographical expanse of the country. With 38% contribution to the nation’s GDP and 40% and 45% share of the overall exports and manufacturing output, respectively, it’s hard to ignore its role in pushing the India to higher rate of growth
MSMEs require timely and adequate capital infusion through term loans and working capital loans, particularly during the early and growth stages. Previously, the MSMEs have relied on following financial resources for their prerequisites:
- Retained earnings andcapital through the sale of assets
- Inheritedinvestment, personal savings, loans from the kith and kin and loans from unregulated market
- Institutional financing from the commercial banks
- Venture capital funds/ seed funds
Challenges of MSMEs
The biggest challenge MSMEs face in India is related to the high cost of credit and in many cases unavailability of credit. To address this, many schemes for the development of MSMEs have been launched by the central and state governments.
However, the lack of adequate and easy access to business credit has continued as a major obstacle for their growth. From inefficacy of measures in credit flows (such as credit scoring for SMEs) to information asymmetry faced by banks and financial institutions, there are many challenges that have negatively impacted MSMEs in the Indian economy.
The challenges can be categorised in following high level buckets:
1.Information asymmetry: Lack of ‘soft’ and ‘hard’ information
- Non-cooperative processes of traditional financial players:
- Relationships of SMEs with banks,
- Availability of low credit facilities because of the origin and size of banks,
- Long-drawn decisions on credit financing for SMEs and delays in fund disbursement,
- A specific bias against smaller-sized loan portfolios
- The requirement of complex collaterals for obtaining term loans- even at very higher rates
- Non-standardized project appraisal systems for term loans, etc
- Cumbersome processes and non-task oriented structures of Indian banks,
With the prevailing situation in market, MSMEs are looking for easy, affordable and quick funding opportunities for setting up their operations. And that’s where the power of digital platforms havecome into the picture. The new age financial service players are breaking newer grounds and make it simpler for the borrowers to access the credit facility from their place. These players have made us realise that financial services are not limited to the doors and floors of a bank.
Factors for the Growth
As alternative lending enters its third-generation, players like Faircent and Lending Club are paving the way for businesses to access the funding they need. Digital lenders are effectively reducing the time required to obtain a loan or mortgage. Underwriting has become more automated through powerful algorithms and big data.
Peer-to-Peer (P2P) lending has changed the dynamics and serving as a long-term solution for the capital requirements of many SMEs. P2P lending generally operates online; wherein marketplace like Faircent introduce MSME borrowers directly to a wide range of investors and lenders. Also, loan approvals are on the basis of current/ future cash flows and not based only on the historic financial statements of SME businesses.
All this has allowed these new age financial players to attract not only significant attention and financial backing, but also allowed for a much more agile and innovative industry.