MSMEs are the backbone of India’s economy, contributing over 30% to the country’s GDP, 44% of exports, and employing over 164 million people. Despite their significant role, MSME credit penetration in India stands at a mere 14%, lagging behind larger economies like the US and China. To achieve India’s $5 trillion economy vision, addressing the growing credit needs of MSMEs is essential.
Here are seven strategic approaches to bridge the MSME credit gap:
1. Statutory Credit Allocation
The Reserve Bank of India mandates that banks allocate at least 40% of their Adjusted Net Bank Credit to priority sectors, including MSMEs. This ensures that these enterprises receive a guaranteed portion of credit, preventing them from being overshadowed by larger businesses.
2. Lower Interest Rates and Favorable Terms
Loans under Priority Sector Lending (PSL) often come with subsidized rates, longer tenors, and less stringent collateral requirements. This makes it easier for MSMEs to access and service these loans, reducing their overall cost of capital.
3. Improved Access to Credit
PSL policies reduce the perceived risk of lending to MSMEs by offering credit guarantees. Traditional Financial Institutions, NBFCs, and fintechs leverage digital platforms and big data to provide quicker, more accessible credit solutions tailored to MSMEs.
4. Development of Tailored Financial Products
Financial institutions create specialized products for MSMEs to meet their PSL commitments. These products address the unique challenges of smaller enterprises and may include advisory services to help manage finances effectively.
5. Empowering MSMEs with Embedded Finance
Embedded finance is revolutionizing how MSMEs access capital. By integrating financial services directly into the platforms where businesses already operate, such as e-commerce and supply chain systems, embedded finance offers seamless access to credit when and where it’s needed most. This approach not only simplifies the borrowing process but also enables MSMEs to leverage their existing business data for more favorable financing terms. As embedded finance continues to gain traction, it’s poised to become a cornerstone in closing the MSME credit gap.
6. Government and Institutional Support
Government-backed initiatives, like SIDBI’s MSME Emergency Credit Line Guarantee Scheme, provide essential liquidity to MSMEs during challenging times, ensuring their continued operation and recovery.
7. Leveraging Technology Innovations
Innovations in credit solutions, including cash flow-based financing, use alternative data to create robust credit profiles for MSMEs. Collaborative efforts between banks, NBFCs, and fintechs enable the development of customized solutions that meet the evolving needs of these businesses.
A dedicated MSME bank and initiatives like the Open Credit Enablement Network (OCEN) are poised to revolutionize credit access for MSMEs, making it more efficient, fair, and transparent. By aligning on the opportunities that PSL presents and leveraging innovations like embedded finance and public-private partnerships, India can unlock the full potential of its MSMEs, fostering economic growth and realizing the vision of a Viksit Bharat. The article was originally published in Financial Express: 7 ways to bridge the MSME credit gap by banks, other lending institutions – SME News | The Financial Express
