Only 15% of Indian MSMEs’ credit demand met by formal lending: Report

The glaring inadequacies in capital access to micro, small and medium enterprises (MSME) have been crystallised by a report tabled on Wednesday, which found that only 15 per cent of the addressable credit needs of this segment are being met by the formal lending sector.

The report - India MSME Lending Landscape 2022 – compiled by BLinC Invest, a venture capital firm, estimated the total demand for credit from these entities at Rs 69.3 lakh crore. The dismal coverage of this by the formal credit system leaves the sector, contributing 30% to Asia’s third-largest economy, in a quandary.

“While there is capital available, since the banks lend to large NBFCs, who then lend it to smaller ones, there is this layering effect. Ultimately, the cost of capital becomes very expensive,” said BLinC Invest Founder and Managing Director Amit Ratanpal.

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There is a lack of awareness, among MSMEs, on benefits of financing or streamlining in documentation. “The documentation process is still a nightmare,” Ratanpal observed. The lack of formal bookkeeping and outdated underwriting process hurts their prospect of accessing loans. Micro and small enterprises are worst at it and it reflects in the fact they account for around 95 per cent of the overall credit gap. India is home to around 6.34 crores of MSMEs out of which micro-enterprises account for more than 99% of them.

The need for tailor-made products, the heterogeneity of their profile, unpredictability of cash flows, remote locations and need for collection agents to make physical visits over protracted recovery process, have them categorised at high-risk clientele.

Policymakers and state governments need to do more to make credit more accessible to the sector that employed 25 per cent of the country’s working population, urged Ratanpal. “Maybe now is a good time for the government to roll out awareness campaigns. Secondly, I think each of the states should start really coming out with their own schemes on how they want to support various MSMEs and partner with some of the fintechs,” he added.

The report also identified POS financing, supply chain finance through the anchor, NBFC (with branch network), and embedded finance as the ideal models to improve access to credit for MSMEs.