Enhanced due diligence of MSMEs is key to better credit access
MSMEs have come to be known as the growth engines of the Indian economy and rightly so, given that they generate nearly 30% of India's GDP and employ a large number of people. MSMEs in India are growing rapidly, with FY21 witnessing a 21% surge in the incorporation of new companies. This momentum has continued in FY22 despite the odds.
However, MSMEs are also having to deal with the increasing burden of compliance like GST filing and limited access to credit. Nevertheless, amid the pandemic, the one thing that has picked up pace among MSMEs is their rapid adoption of digitization and automation. More enterprises are seeking to automate most of their operations to keep up with the new regulations and go digital for invoicing, transactions, and even loans and insurance. There has been visible proof of this in the widespread use of QR codes and POS terminals now present at almost every mom-and-pop store in the country.
Another trend arising from the demand for automation is the emergence of SMB-focused B2B service providers. These enterprise tech providers are offering cost-effective solutions for automating/digitizing various functions of MSMEs. We are already seeing an increasing number of businesses such as Udaan and other e-commerce marketplaces focusing on SMB enablement. This has led to the springing up of more players in the lending space, with even large corporates entering the market.
Yet, historically, there is the challenge of conducting thorough due diligence of MSMEs for financial institutions as they seek reliable data around companies as a basis for lending. So, despite the rapid surge in MSMEs, access to credit remains restricted to those companies that can furnish robust data to portray their genuineness, even as the lending market expands to service more MSMEs. To add to this, some of these loans have also been troublesome for lenders owing to rising defaults. India Ratings & Research expects gross NPAs from this segment to climb to 13.1% by FY22 from 9.9% in FY21, which has led to hesitation on the part of many lenders.
Funding is definitely a major hurdle for MSME growth. Understanding how we can ensure that credit-worthy MSMEs receive the funding they need, with lenders developing comfort around these kind of loans remains key. Eventually, it all boils down to how lenders can verify the credibility of the MSME.
Clearly, there is need for reliable intelligence of any business that lenders are dealing with. Today, solutions like K:Scan that are leveraging big data and AI algorithms to enable access to credible data points that can be used for better targeting and developing sharper go-to-market strategies for lenders. FIs can smoothen their due diligence process and figure out whether the MSME is real or a shell/hawala entity, is the money going into right accounts, is the SME selling genuine products or is it indulging in online swindling, are their goods as promised or of substandard quality, is there solid customer support available, etc-all using existing AI/ML and big data solutions.
Lenders can also verify the entity's genuineness by skimming through hundreds of databases including GST and ITR filings, while checking for any details around shareholding, management, red flags, litigation and negative news around millions of MSMEs in India, who are otherwise not required to make their records or information public.
In addition, solutions like Video KYC are allowing for quick onboarding. This is not only simplifying the lending journey but also allowing financial service providers to extend offerings such as small business credit cards, credit limits, insurance to SMBs, thus allowing them to capitalize on the growth in this segment. More corporates are entering the B2B lending space as micro enterprises expand into medium and large ones.
Emerging and existing technology is allowing lenders to conduct robust due diligence on smaller entities like MSMEs. This can significantly enhance credit access to MSMEs and better the overall financial inclusion rate in the country, surpassing gigantic hurdles that MSMEs and FIs face while driving growth.