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5 ways fintechs can help MSMEs solve their creditworthiness issues

Credit and finance for MSMEs: While there was an expected dip in credit demand during the roughest years of the pandemic, the MSME sector is on its path to recovery, and some industry segments are crossing the pre-pandemic levels.

Credit and finance for MSMEs: Raising capital has been a challenging task for small and medium businesses in India. The last two years have been a reminder of the existing credit gap in India’s MSMEs sector. As per IFC estimates in 2021, the total addressable credit gap in the MSME segment is Rs 25.8 trillion, growing at 37 per cent CAGR. The total addressable market demand by the MSME sector is approximately Rs 37 trillion, of which banks, other institutions, and NBFCs supply about Rs 10.9 trillion. 

While there was an expected dip in credit demand during the roughest years of the pandemic, the MSME sector is on its path to recovery, and some industry segments are crossing the pre-pandemic levels. As per the SIDBI-CIBIL Pulse report released earlier this month, the credit demand by MSMEs has been progressive after the second wave. Current credit demand is about 1.6x times the pre-Covid phase. Commercial credit inquiries have picked up in the last year owing to a recovery in economic and business activity.  

Given this situation, fintech can step in and address the potential lending opportunities for the MSME sector. Here are five ways in which they can help MSMEs resolve their credit problems: 

Tailor-made products: The technology and digital capabilities of fintechs allow them to customize products that meet the cashflow requirements of the MSMEs and extend short-time, small ticket size loans. Such loan products are useful for MSMEs that require constant working capital for growth. Fintechs, with their digital capabilities, can ensure minimal documentation and quick turnaround time for MSME borrowers. Fintechs can offer unique features to their customers such as daily repayment models, which further make availing of credit simpler for them.  

Alongside the credit offerings, few fintechs provide digital services marketplaces to small businesses, where they can connect with multiple digital solutions providers across digital payment, digital delivery or digital discovery platforms. Traditionally, there were blanket financing solutions for small businesses. With fintechs entering the lending ecosystem, financing has been customized in accordance with the nature of the businesses they were lending to. With the advanced usage of emerging technologies such as data analytics and machine learning, fintechs are providing several customized products to their customers as per their working capital needs.