India’s significant MSME (micro, small and medium enterprises) industry provides employment and services to more than 100 million of the population. Most of these people come from remote and low-income regions, and one cannot underestimate the industry’s importance to the nation’s GDP.
The sizeable funding needs of this sector demands innovative and creative approaches from banks and financial institutions. Entrepreneurs and MSME owners are aware that traditional credit assessment and loan disbursal techniques are no longer enough. They prefer softer methods and new financial products. This awareness keeps traditional lenders on their toes, as they can’t afford to lose MSME borrowers to alternative lending channels. Even private equity venture capitalists now share the same reservations despite having a higher risk appetite.
Raising sufficient funds is a perpetual challenge that Indian MSMEs face. Lenders require more convincing about a small business owner’s repayment capacity and also because of lower profitability from the sector. With constant NPA (non-performing asset) issues, they find that an MSME’s improper bookkeeping, lack of official documents and part-time staff act as deterrents.
However, the needs of the MSME industry are so significant that they cannot be ignored. Lenders thus need to modify their financial products when dealing with MSMEs. Instead of turning their backs, lenders need to devise sustainable financial products that meet industry demands and provide sufficient ROI.
In light of this, some of the key financial products offered to MSMEs by banks, NBFCs, finch startups and the government are:
The primary requirement of MSMEs is working capital to meet their operational expenses. Maintaining a positive working capital balance relies on liquid financial sources, and lenders offer different financial products that meet these MSME needs. These include:
- Secured and unsecured loans – While MSMEs can obtain secured loans for more copious amounts, unsecured loans are faster and hassle-free. These also don’t usually require collateral documents and assessments.
- Overdrafts – The ability to withdraw more money than available in one’s account (based on the account type, creditworthiness and repayment history) provides instant liquidity to MSME borrowers.
- Cash credit facilities – These are unique schemes that the central or state governments offer. They allow MSMEs to obtain ‘x’ per cent of their annual turnover as a loan, as long as they meet certain criteria.
- Bill discounting – MSMEs can sell their account receivables to an extensive network of buyers and financiers at a discounted rate in exchange for an immediate cash injection.
- Pre- and post-shipment finance – Credit extended to MSME exporters before or after they ship export orders to enable them to meet working capital needs.
For lenders, deducing the income and eligibility for MSME borrowers is tougher. It requires interviewing them, conducting personal bank account checks and more nuanced credit assessment processes that have not traditionally been undertaken. As a result, MSME borrowers are also in need of personalised advisory and consultation services. Lenders are offering such non-monetary products to MSMEs in creative ways to enhance their repayment capacity and financial literacy. These include:
- Structured scheme information – A lack of knowledge about various schemes proposed by the government, banks or other parties deprives MSMEs of the chance to benefit from them.
- Financial market education – They also don’t get structured or optimal access to financial market information. Many lenders and financial institutions are thus leveraging online channels to provide these foundations for MSMEs and help them build profitable businesses.
- Non-financial support – Popular non-fund-based products range from bank guarantees and letters of credit to remittance services and app-based banking.
- Value-added services – Experienced institutions are also extending support in the form of mentorship, financial guidance and a reliable support system for early-stage MSMEs.
- Working capital training – Apart from funding, MSMEs also require essential business management tools and expert advice on how to balance working capital. Lenders use one-on-one coaching and online finance courses to offer such non-financial products to the industry.
Providing a variety of services to MSMEs requires a deeper understanding of their unique requirements and situations. By leveraging digital channels and analytics, lenders can successfully study and contact MSMEs at critical moments and offer help. These channels can also boost turnaround times and data collection. Such services are especially helpful for small-ticket loans so that lenders don’t spend much time or money assessing MSME borrowers. They can quickly disburse the appropriate funding/services as needed.
The MSME industry is rightly considered a priority sector for the growth of the economy and employment. It is, therefore, critical for lenders to offer an assortment of financial and non-financial products that can help the sector flourish. Whether in the form of monetary products or advisory services, the financial services industry has several ways of enabling MSME growth through lending.