The government is determined to revive the MSME sector to achieve inclusive growth and self-reliance, as it contributes about 30% of India’s GDP, employs about 11 million people, accounts for nearly 40% of exports total and more than half of them. are based in rural India and advocate Atmanirbhar Bharat.
According to the CMIE Prowess database, Indian MSMEs depend on unsecured loans for Capex and accept only a few long-term loans. This is supported by the findings of a recent study (NIRDPR, 2021), which found that nine out of ten MSMEs rely on informal sources for working capital and term loans (mainly unsecured loans).
Many MSMEs have not been able to take out secured loans with lower interest rates due to a lack of appropriate asset cover (collateral), forcing them to resort to unsecured loans with lower interest rates. higher interest rates. This has a negative impact on their profitability and economic viability. After a 14-year hiatus, the government changed the definition of MSMEs to account for inflation and the devaluation of the rupee against foreign currencies between 2006 and 2020. The depreciation of the Indian rupee to 71 (against US dollar ) pushed MSMEs to operate on a small scale by setting up many other export subsidiaries/units to ensure they receive government benefits.
According to the new definition, export earnings are deducted from total sales to calculate MSME turnover, which is a positive sign not only for the sector but also for exports. The new strategy is expected to boost the growth of the “new India”, as the old definition of MSMEs had a regressive effect on exports, expansion plans and job creation of companies.
It will also solve the long-term challenge of securing credible finance for MSMEs. According to an IFC assessment, SMEs account for only 6-7% of lending and have a credit gap of around $1.1 trillion. The disparity can be attributed to structural issues such as reliance on credit history and lack of understanding of digital lending solutions. This large part of the credit gap will now be resolved through structural market-based solutions. Here are some of the best small business financing strategies that will be very effective in growing small businesses to their full potential.
Loans by fintech companies
Many credit applications have been rejected before, including applications for business and consumer loans. Lack of credit history or bad credit history, lack of documents and other factors were some of the reasons for rejection. Fintech has stepped in with new ways to reassess such cases. Better technology and the solvency of applications have moved cases from the red zone to the green zone. Consequently, fintech is rapidly gaining traction among borrowers as a more accessible alternative to traditional payment and banking systems of financial institutions.
Collaborative financial ecosystem
Leveraging the anchor ecosystem of large companies/brands is another attractive method for financing MSMEs. Many companies bring together the infrastructure and mature ecosystem of large enterprises, providers, and lenders on a single platform. These platforms usually have many integrations (ERP/Accounting/GST) and provide deeper access to data that is usually not available to banks in real time or at all. Having a rich source of structured and unstructured data offers new opportunities and avenues for MSMEs to explore. The government’s drive to digitize MSMEs, as well as the requirement for compliance, is contributing to the cause and adoption of such solutions.
Integrated finance or banking
The seamless integration of financial services into a traditionally non-financial service is known as integrated finance, sometimes referred to as integrated banking. In the past, if a company wanted to operate in the world of financial services, it had to do so through its own fintech division. It took huge investments, took years to build, and took even longer to turn a profit. Integrated financial infrastructure divides by 10 the barrier that prevents digital platforms from easily offering financial services to their customers. Legacy systems from traditional lenders are being upgraded by plug-and-play connections from EF startups, enabling them to bring their products to market in new-age ecosystems. The integrated finance market could be worth $7 trillion.
This model allows startups to raise funds by donating a portion of their future profits. Traditional small business financing choices have been to take out a loan from a bank or from family and friends in exchange for a fixed interest rate, collateral, or personal guarantee. These problems are solved by revenue-based financing, which provides cash to a company in exchange for a royalty on its revenue while taking no equity in the business. Great alternative for D2C brands, SaaS or education companies.
All of these market-driven solutions have the potential to create a strong environment for MSME lending. These will facilitate the disbursement of working capital loans for underrepresented MSMEs, allowing them to focus on what matters most: growing their business.
The opinions expressed above are those of the author.
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