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:
Fund-Based Products
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:
Non-Fund-Based Products
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:
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.
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