The 'M' of MSME: How microenterprises are being empowered in India?

Manish Khera, Founder & CEO, HappyThe Indian MSME sector has more than 51 million MSME units that collectively employ about 117 million people. This is roughly one-fourth of the labour force that the country has. The sector, moreover, contributes 37.5 percent to India’s GDP and generates 37 percent of the national manufacturing output on an annual basis. However, in spite of its significance and strategic importance, this sector, and especially its ‘micro’ segment, is often on the receiving end of a skewed traditional credit flow. But times, they are a-changing, and they’re changing for good for microenterprises.

Digital technologies are gaining prominence with the digital adoption picking up in India. The booming digital market, coupled with the implementation of GST, has enabled Indian microenterprises to do away with their traditional geographical constraints and deliver their products and services to the market at large. The digital ecosystem, comprising e-commerce marketplaces and auxiliary services providers, is also extending end-to-end logistics support that a microenterprise ideally needs to foray into the ever-expanding online world. However, the only constraint that stands as a challenge vis-à-vismicroenterprises is the financial one.

But why is this so? Especially as government has several initiatives specifically aimed at the MSME sector.
To understand this, first we have to understand what the primary motive of any financial institution is. It is to gauge the creditworthiness of a business entity and ensure repayments of the loan for the given tenure. Doing so is relatively easier for larger enterprises since considerable business-related data is available to substantiate the analysis. However, as we move towards smaller businesses, this data begins to fade. Ultimately, negligible information is available to validate the business potential, and hence, the creditworthiness of a microenterprise.
According to a Google and KPMG study titled ‘Impact of internet and digitization on SMBs in India’, digital businesses in India are growing profits twice as fast as their offline competitors and are generally employing 5 times more people as compared to offline SMBs, obviously because of the merits of the ‘online’. At present, only 32 percent of Indian SMBs are digitally-connected, -enabled, or -engaged, though the digital adoption is rapidly increasing within the domain. This is also allowing banks and digital lenders to adopt unconventional approach for catering to the micro segment of MSMEs. With the growing digitization, the data that’s being generated is exponentially increasing, and this data is being used by digital lenders and banks while being coupled with cutting-edge technologies such as Artificial Intelligence and Big Data to gauge the true creditworthiness of a microenterprise.

They are also actively collaborating with e-commerce marketplaces and digital remittance players to source additional data for making their credit analysis more effective. Simultaneously, this approach is also reducing the delays in credit disbursal, while making the ‘cost of credit’ cheaper. So, while the credit is delivered time-efficiently, it also comes across as a pocket-friendly alternative for microenterprises. Generally, banks leverage the technological edge of digital lending platforms and these platforms, on the other hand,are benefiting from the large capital reserve available with the banks.

The entire ecosystem, with all of its stakeholders,iscollectively solving the long-standing and byzantine challenge of credit availability that microenterprises across India usually face. And as credit is one of the primary requisites for growth, its effective delivery is undoubtedly strengthening the ‘micro’ segment of MSMEs, ultimately driving the Indian GDP to a double-digit growth rate that it aspires to achieve.