The MSME (micro small and medium enterprise) sector in India is a dynamic and vibrant one that holds immense potential for the economy. It significantly contributes to the GDP, exports, industrial output and employment. However, the sector routinely suffers from a shortage of finance and affordable lending. Central and state governments have appropriately granted priority status and are ensuring that MSMEs get the financing and lending options they need.


Understanding MSME financing needs


MSMEs involved in manufacturing or the services industry have unique finance requirements. Lenders are accordingly customising their approach and product portfolio to help them. MSMEs differ from established enterprises in terms of repayment capacity, financial literacy and structured bookkeeping. For instance, MSMEs often work with part-time chartered accountants and financial staff. So, their official accounts and documents do not necessarily follow preset regulations.


As lenders assess MSME needs and study their business models and profitability, they must be aware of this. They must understand small enterprises’ operations and choose methods that favour personal meetings and interactions.


Another way for lenders to assess financial needs is by studying the industry an MSME serves. Positive trends in that industry determine how effective and profitable an MSME can be. A lender’s experience and knowhow come into play here. Accessing credit bureau information is an additional factor that can help a lender understand the borrower’s repayment capacity and ability to run a successful business.


The MSME lending process


While the traditional process for MSME lending requires understanding the needs and suggesting suitable financial products, digital channels are transforming the process. Data collection is now much more straightforward. Lenders can easily view digital bank statements, collect information on apps and have KYC forms filled up online. These improve turnaround times and the ease of submission. One-on-one discussions and personal visits are interspersed with virtual meetings and recruiting digitally-enabled third parties.


For secured loans, collaterals are assessed through traditional or digital channels before loan disbursal. Post credit eligibility studies, lenders issue terms and sanction loans. They are increasingly turning to digital channels that require minimal interactions, especially for smaller-ticket loans. In partnership with governments, they are thus aiming to make the loan disbursal process smooth and fast. The objective is to eliminate complicated procedures that cause delays. Lenders are encouraged to perform underwriting and risk assessment with the available information to ensure that MSMEs get the funding they need.


Lenders can deploy advanced technologies such as artificial intelligence, data analytics and big data tools to improve decision-making and credit assessment. The rise of FinTech companies and alternative lending platforms is also helping the MSME sector flourish. New solutions sort through the unstructured financial data that MSMEs deal with and are beneficial for streamlining the lending process. They help with the evaluation and review of loan applications, speed up credit analysis, reduce the cost of loan disbursals and streamline the decision-making process. Increasingly, lenders are gaining competitive advantage by integrating automated underwriting platforms as they offer MSME finance.

The MSME credit assessment process


Today, customised appraisals depending on the segment and documentation availability of the borrower have become the norm. Income tax returns and officially audited account books are not available in all cases. As a result, personal discussions are preferred to assess the borrowers’ income and eligibility. Lenders also study MSME bills and average bank balances to determine the turnover, margin and profits.


Credit assessments are tricky, and lenders are opting for combinations of financial appraisals and personal interactions. Traditionally, reaching out to credit bureaus for credit history has been a crucial part. But MSMEs often don’t have sufficient information to form credit history reports on. In case of secured loans, collaterals are routinely assessed, and their value is ascertained. The introduction of GST, too, has driven the availability of GST returns, which lenders can examine for eligibility assessments.


Lenders typically consider MSMEs to come under the category of NPAs (non-performing assets). Hence, they are wary of lending money to MSMEs without proper assessments. For MSMEs, in comparison, getting funding in time is essential to continue operations and make repayments in time. Such is the nature of their existence. Thus, the onus is on lenders to streamline their lending operations. They can play a decisive role in helping MSMEs achieve timely finance and balance their working capital needs.

If this demands that they revisit their credit assessment and lending processes to meet the present and future needs of MSMEs, then they should be prepared to do so.