dr Pramod Varma, chief architect of Aadhaar


Digital financial solutions in India today have helped create a new path for the people of the country 43 million medium and small businesses to borrow money – and that’s no small thing considering that institutional financial service providers only offer service 16 percent of the total credit demand coming from the sector.

Because India’s MSME sector is so fragmented and largely disorganized, Determining the demand for credit poses major challenges for banks.

“Reaching small businesses is a costly and time-consuming task for banks, especially given that MSMEs rarely ask for large loans. So it doesn’t seem worthwhile for banks to spend so much time and effort on sachet loans,” said Dr. Pramod Varma, Chief Architect of Aadhaar & India Stack, who also advises the NPCI, on the sidelines of the Bangalore Tech Summit 2020.

A lack of credible data on the financial status and behavior of MSMEs and SMEs is another major concern for lenders. Even if they manage to get the data somehow, verification is troublesome.

“Government agencies and institutional lenders want to take advantage of this opportunity, but they can’t because the sector is still unorganized,” added Dr. Pramod added.

For banks, the ability to lend to millions of small businesses is an attractive proposition because of its impact on the single economy. But the high Cost of processing these credit requests means the loans they eventually pay off have higher than normal interest rates — and those borrowing costs may not make economic sense for small businesses.

Helping small businesses access credit

but Fintechs and other digital platforms are helping to plug those holes and are innovatively enabling credit availability for these small businesses today.

Next, network aggregators such as food delivery networks, healthtech platforms and e-commerce, among other aggregators, make it easier for small businesses to access credit services through the pre-existing relationships they have with financial institutions. For example, a small restaurant on Swiggy take out a loan using their relationship with the aggregator.

Via platforms such as OZEN (Open Credit Enablement Network), which can help reduce the cost of processing small loans and create a common language for lenders and lender-service providers to distribute lending products at scale; aa (account aggregators) facilitating the sharing of real-time financial information with user consent, and UPI, which can help facilitate automatic loan repayments, Fintechs and financial institutions can better serve small loan requests for SMEs and MSMEs.

“With so much innovation in MSME lending, India is definitely preparing to bring the sector and financial institutions together in a more cohesive, unfragmented way,” said Dr. Pramod.

“Especially in a post-COVID world, MSMEs’ need for credit is higher than ever before.”

Edited by Teja Lele Desai
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