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These four ‘emerging business models’ can potentially bridge Rs 25 lakh cr credit gap in MSME sector: Report

Credit and Finance for MSMEs: Government Initiatives such as MUDRA, TReDS, India Stack, AEPS, Account Aggregator, Open Network for Digital Commerce (ONDC), Open Credit Enablement Network (OCEN) etc. have helped increase formalization of the MSME segment and fast-tracking the growth.

Credit and Finance for MSMEs: The early-stage venture capital firm BLinC Invest on Wednesday noted that the Rs 25 lakh crore credit gap in the MSME sector can be potentially addressed through four “emerging business models”. According to a report published India MSME Lending Landscape by the VC firm, “four business models have been identified as white spaces which have a large opportunity – anchor-based supply chain finance, point of sale (PoS) financing, NBFCs (with branch network) and embedded finance,” as less than less than 15 per cent of the MSME credit demand is catered by formal sources.

Explaining the four models, the report said first, anchor-based supply chain finance provides a large opportunity since currently the product offered to majority of the MSMEs is term loan whereas their requirement is a working capital loan for financing their inventory purchases. Second, adoption of PoS terminals is expected to be further improved by offering MSMEs value-added services such as receivables and payments management helping them increase footfall with targeted services to customers. 

Third, NBFC segment with branch network has seen increased participation in recent years and is expected to grow further catering to the underserved credit demand in the semi-urban and rural pockets of the country. And lastly, embedded finance is expected to enhance credit approval process by looking at transactional data built over a period of time and understand the heterogeneity of the segment and offer tailored financial products.

The report’s methodology included on-ground visits and telephonic interviews with MSMEs across over 15 states and interviews with key industry leaders in the financial services sector along with various secondary research data. 

Moreover, “proactive government initiatives such as MUDRA, TReDS, India Stack, AEPS, Account Aggregator, Open Network for Digital Commerce (ONDC), Open Credit Enablement Network (OCEN) etc. have helped increase formalization of the MSME segment and fast-tracking the growth,” the report added.

In terms of density of MSMEs, Uttar Pradesh, West Bengal, Tamil Nadu, Maharashtra, and Karnataka were the top five states with the highest number of MSMEs.

Also Read: 45% jump in FY22 credit to women-led MSMEs from pre-Covid level by public sector banks: RBI data

Amit Ratanpal, Founder & MD, BLinC Invest said, “The MSME market is largely underserved in terms of financing and solving this huge credit gap is critical to growing the Indian economy as a whole.” 

BLinC Invest focuses on edtech and fintech startups and has invested more than Rs 300 crore in 25 companies and exited from eight companies in its portfolio.