MSME Financing Market in India

MSME stands for Micro, Small, and Medium Enterprises, which are businesses classified based on their investment in equipment, machinery, and turnover. MSMEs play a vital role in economic development, contributing significantly to employment, production, and exports in many countries, especially in developing economies. Over 63 million MSMEs operate in India, employing over 111 million people. The contribution of MSMEs to the country’s total exports is 45%. Many MSMEs, particularly micro and small enterprises, struggle to access formal financing due to the lack of credit history, collateral, and comprehensive documentation. Fintechs are revolutionizing MSME financing in India by leveraging technologies to assess creditworthiness through alternative data and digital processes. Platforms such as Lendingkart, Capital Float, and Kinara Capital offer fast, collateral-free loans through digital channels, which is especially useful for underserved MSMEs.

However, limited access to funding has always restricted the growth of MSMEs.

The government has introduced several policies which extend loan facilities to MSMEs to address the problem of unavailability of enough credit.

Market trends:

The adoption of digital lending platforms and fintech solutions for MSME financing is increasing.

These platforms offer swift and hassle-free credit access, mostly requiring minimal documentation, simplifying the process of securing loans for MSMEs.

Market drivers:

The e-mandate service, initiated by the RBI and the National Payments Corporation in India (NPCI), offers support infrastructure for firms to collect recurring payments in the country. E-NACH, on the other hand, refers to Electronic National Automated Clearing House, a service designed to help merchants handle all forms of recurring payments like SIPs, utility bills, and insurance. E-mandate services are expected to transform the post-approval documentation process, accelerating the MSME financing procedure in India. Digital e-NACH services, launched by fintech players, are replacing physically signed paper-based NACH application forms, thereby reducing financial costs and processing time. The growth of e-mandates is helping both borrowers and lenders to digitally countersign approval documents.

Further, the use of the electronic modes of lending has made transactions more quick, seamless, and streamlined than ever before.

Key deterrents to the growth of the market:

Traditional loan approval processes can be cumbersome and time-consuming, which is particularly problematic for MSMEs that often require quick access to funds for operational needs. Delays in obtaining financing can stifle growth and lead to missed business opportunities. Traditional lenders typically require extensive documentation to assess the creditworthiness of MSMEs. This may include financial statements, tax returns, business plans, and collateral details. Many small businesses, particularly those in the informal sector, may struggle to provide these documents promptly, lengthening the approval time. MSMEs, especially new or smaller ones, often lack an established credit history, which complicates risk assessment for lenders. As a result, lenders take more time to evaluate the applicant, often requiring additional data or guarantors, leading to delays.

MSMEs in sectors with fluctuating revenues or seasonal demand, such as agriculture or retail, may need added scrutiny, as lenders assess cash flow stability over time. This can lengthen the review process.