MSME´s Lending Gap in India
The economy impact of the COVID pandemic in India is no different than other countries, as according to the Indian Ministry of Statistics (2020), India’s GDP growth slowed to 3.1% in the fourth quarter of 2020, different from fiscal year 2019 when the Indian economy had grown by 6.1% (Onmanorama, 2020). This led to a sharp increase in unemployment, a reduction in consumer activities, a negative impact on the supply chain, a drop in fuel consumption and the collapse of the tourist industry, among other consequences.
Furthermore, MSME´s has been absorbing the impact of the Covid 19 pandemic, affecting millions of companies in India. In order to reduce the impact of this pandemic the government announced an Rs 20.9 lakh crore package, mostly made up of subsidized credit to small businesses and farmers, whereas the reserve bank of India (RBI) has reduced the key interest rate by 115 basis points since March. However, most of the private banks are asking for more than 9% interest rate (Economic Times, 2020).
Gap in the lending space
The high interest rate demanded by private banks makes access to credit difficult for MSMEs. Moreover private banks on India still ask for too much paperwork and their process of analysis of MSME mostly rely on the balance sheet. However, private banks don´t understand that most MSME don´t have a very healthy balance sheet, which natural is given their condition. Thus, MSME´s have to seek credit from nonbank financial companies or, simply, stop working. (Economic Times, 2020).
In addition, another reason why banks shy away from lending to the MSME sector is because the fear of unwillingness to repay on the part of the borrowers and the lack of collaterals for borrowing. (Forbes India, 2020).
The solution to the gap in lending space is a crucial topic to solve due to the contribution that this sector gives to the country. Around 75 million MSMEs contribute to about a third of the GDP and 45 per cent of the manufacturing output of the country. Moreover, these companies also provide employment to more than 110 million Indians (Financial Express, 2020). However, according to the World Bank, in India, there is an estimated credit demand-supply gap of $380 billion, meaning that despite the significant contribution to the country´s economy by this sector, it´s still tough to secure access to operational capital.
Fintech in India
India has become one of the fastest growing FinTech markets in the world and also ranked the highest globally in the FinTech adoption rate with China. The overall transaction value in the Indian FinTech market is estimated to jump from approximately $65 billion in 2019 to $140 billion in 2023.
India has overtaken China as Asia’s top FinTech funding target market with investments of around $ 286 million in 29 deals, compared to China’s $ 192.1 million in 29 deals in Q1 2019. Furthermore, according to Findexable (2020), India is the most advanced country in Asia in Fintech
Lending Fintech
Fintech Lending has changed the approach of credit delivery in India through Innovative products and real time solutions. The industry has witnessed 38 per cent YoY growth as on Sep’20, despite COVID pandemic (Business Standard, 2021). Also, the digital lending market in India is poised to grow from $110 billion in 2019 to $350 billion in 2023, which will improve the share of the digital lending market from 23% in 2018 to 48% by 2023. This will make the digital lending sector as the highest penetration sector by digital channels in India (Globenewswire, 2021).
Digital Lending is positioned as an alternative for neglected companies in India, however, although they may be a new alternative, a regulation is necessary that allows to act in a regulated and safe environment.
