MSME challenges to accessing credit 

The majority of MSMEs in India are in rural areas, and many are involved in services. They don’t always have assets like offices or equipment. Without proper documentation of proof of business and collateral, it is difficult for MSMEs to get secured loans. MSMEs may also lack a well-established credit history or operating history, making it difficult for banks to gauge their creditworthiness. Their challenges also include meeting strict eligibility criteria, lengthy and cumbersome application processes, and high interest rates.  

Depending on their location, industry, and other granular factors, MSMEs may also face challenges unique to their individual businesses. Traditional banks may cannot usually cater to such specific requirements or disfavor small-ticket loans due to high operational costs and lower returns. This pushes MSMEs to resort to informal credit sources with very high borrowing charges and repayment terms, making them more vulnerable to financial risks. 

Limitations of Traditional Lending 

MSME’s lending challenges are directly related to the limitations of traditional lending structures. Traditional banks need to catch up to MSME’s evolving credit needs and preferences. The major limitations of traditional lending structures are: 

• Lack of flexibility: Whether it is types of credit products or repayment terms, traditional lenders may not have the technological capability to adapt quickly to MSME credit needs. 
• Long loan processing time: Banks typically take a long time to process loans. MSMEs typically have limited time and resources, and delays in getting financing can have a significant impact on their business operations. 
• Lengthy documentation: Traditional lenders usually require hefty paperwork to provide loans, often leaving MSMEs feeling frustrated and disempowered. 

• Lack of transparency: Not providing adequate details about credit products makes it harder for businesses to compare and make informed decisions when looking to borrow. 
• High charges: Charges such as interest rates, processing fees, etc., may be high, as traditional lending processes generally involve high operational costs. 

Imagine this scenario: A small business less than a year or two old with close to no credit history applies for a loan worth 50 lakhs. First, they may not have enough data about the business’s finances or credit history. They may also be unable to provide substantial evidence of the business’s growth potential. Even if this business is eligible for the loan, the bank may take weeks to process the application and release the funds. Thich means crucial time to react to changing market scenarios or urgent business needs is simply lost. 

Advantages of fintech-based MSME lending 

Fintech companies leverage technologies like artificial intelligence, machine learning, and big data analytics to assess credit risk and streamline the lending process. Here’s how fintech lending help overcome the MSME credit gap: 

• Paperless and contactless processes enable quicker loan approval and disbursal times. This even allows MSMEs in remote parts of the country to get fast, reliable credit. 

Suppose you have an MSME based in a far-off village in North East India. It will be much easier for you to get credit from a fintech company as it may have a smooth online onboarding process that includes digital documentation and video KYC. 

• They can develop innovative, easy-to-use, and tailored credit solutions based on MSMEs’ specialized capital needs industries, such as real estate, technology, and healthcare. 
• With fintech lending, you can typically apply for a loan online in just a few minutes and receive a decision within hours or days. This, combined with the lower overhead costs associated with online financing, makes fintech lenders an attractive option for MSMEs looking to access capital quickly. 

• They require minimal documentation, making it easier for small businesses with limited credit and operational history to access credit. 

Fintechs have the ability to provide a more nuanced assessment of your business’s creditworthiness. They use data such as transaction history to predict a business’s future cash flow potential. Using this, they can gauge a business’s financial health and potential for growth and quickly provide small-ticket loans for urgent capital needs. 

• They can identify targeted financing opportunities for MSMEs, helping them fuel their business growth when needed. 
• They can partner with banks to help MSMEs avail of big-ticket loans. 

Banks have wider networks and lending capacity. Fintechs have the technology for alternate credit assessment methods and improved customer experience. By combining their strengths, fintech companies can facilitate the last-mile delivery of lending services to underserved MSMEs. 

• Fintech lending also offers greater transparency and flexibility, with many lenders providing clear information about their loan products, interest rates, and fees. You can easily compare offers and choose the financing option that best meets your business’s unique needs and circumstances. 

Lending-first approach to closing the MSME credit gap India 

Fintech companies that follow a lending-first approach can effectively address the unique challenges associated with MSME lending. It combines crucial factors such as a business’s intent to borrow, credit score, profitability, reach, scalability, and ability to adjust to changing market scenarios. This includes developing innovative credit assessment models that holistically evaluate the credit risk associated with small businesses, streamlining the application process to reduce delays and administrative burdens, and offering transparent, flexible MSME financing options that are more accessible, secure, and fuel their growth. 

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