Digital lending to MSMEs could touch Rs 6-7 trillion by 2023: Report

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In the backdrop of the crisis at infrastructure lender IL&FS, non-banking finance companies are facing a liquidity crunch, and many believe it will hurt lending to the micro, small and medium enterprises, already hit by demonetisation and the Goods and Services Tax. Now, a new report states that digital lending to MSMEs could disrupt the status quo in financial services and open up opportunities to innovative startups as well as traditional lenders.

According to the report by impact investing firm Omidyar Network and the Boston Consulting Group, digital lending to MSMEs could surge 10-15 times by 2023 to around Rs 6 trillion to Rs 7 trillion in annual disbursements.

"Digital lending has the potential to propel the productivity of India’s MSMEs to global leadership," said Roopa Kudva, MD, India at Omidyar Network.

India has 60 million MSMEs (businesses with annual revenue of up to Rs 250 crore), employing around 111 million people and contributing around 30 per cent to the country's gross domestic product. However, they lag considerably to their peers in other countries like China and the United States in GDP contribution. A reason often cited for this is a lack of formal credit sources. The report indicates that almost 40 per cent of the MSMEs end up borrowing from informal sources, and interest rates can be 2.5 times higher on average, compared with the formal sector.

The Omidyar and BCG report, which surveyed over 1,500 MSME owners with annual business revenue between Rs 3 lakh to Rs 75 crore, says that recent developments like the unified payments interface (UPI), a sharp fall in mobile data charges among other things will fuel digital lending.

"First, government policies since 2016, including UPI launch and the 2017 GST, all have led significant numbers of MSMEs to formalise and digitise their businesses. Second, increased market competition since 2015 has led to a dramatic reduction in mobile data cost, driving significantly increased MSME connectivity. Finally, the maturing India Stack, along with API-based data availability, now allows for end-to-end digital MSME lending with loan approval times as short as one day," it said.

Over 60 per cent of the MSMEs expect to have significant digital payment streams in the next three years, the report envisages, and this digital data stream will provide lenders with critical information that can then be used to make appropriate underwriting decisions.

“Easier and cheaper credit through digital lending has the potential to trigger a virtuous cycle for formalisation; up to 85 per cent of MSMEs could be formal by 2023,” said Saurabh Tripathi, director and Asia-Pacific leader, financial institutions practice, BCG.

A number of business models could emerge over time. For instance, platform partnerships between digital lenders and platform-based businesses, such as e-commerce players and payment providers, could help digital lenders acquire those MSMEs transacting business on the platform, the report points out. There could also be supply chain partnerships between digital lenders and supply chain aggregators like in automobile parts manufacturing.