India’s MSME sector has grown significantly over the last few decades. With continuous government support, improved IT infrastructure, digital payment facilities, and a conducive environment for business, many enterprises have become more formal. With the integration of artificial intelligence (AI), and fast-evolving business analytics tools, lending has become smoother, faster, and better. However, despite these improvements, many MSMEs still struggle to access credit.
It is often said that money is available in the financial system, but the real challenge is accessing adequate money at an affordable rate. In the absence of proper documentation and other formal requirements, many small businesses are unable to obtain the right amount of credit at the right time.
In most cases, these small enterprises operate stable businesses with regular customers and steady demand. However, when it comes to recording transactions and complying fully with legal requirements, their records are often not well documented. Many businesses continue to maintain informal accounts.
In some cases, small businesses face issues such as seasonal income, delayed payments, and the absence of a clear calculation of net worth. At times, it is also difficult to distinguish between the net worth of the business and that of the owner. Because of these factors, traditional lending models often find it difficult to assess such enterprises.
In recent years, however, following the introduction of GST and the growing use of digital payment systems at both individual and enterprise levels, more businesses have begun registering themselves formally. This registration, combined with proper accounting and documentation of the business entity, helps lenders understand these businesses better. When businesses maintain proper records, lenders feel more confident. This reduces the perceived risk associated with such enterprises and increases transparency.
Risk perception is also asymmetric across sectors, as different segment face different challenges. For example, manufacturing businesses depend heavily on raw material prices and supply chains. Their working capital requirements are closely linked to fluctuations in raw material costs and other supply chain factors.
On the other hand, service and trading businesses often face challenges related to technology adoption costs and delayed payments. Therefore, it is evident that lending models cannot be universal and must be customized, at least for different categories of businesses.
Today, with the availability of advanced assessment tools, MSME lending has improved significantly. With tools such as digital scorecards and GST-based data, risk assessment of MSMEs has become easier and more reliable. However, despite these advancements, it is important to recognize that every business is different. Many first-time entrepreneurs require guidance and support. In Tier-2, Tier-3, and Tier-4 towns, fully digital loan processes may still be difficult for many borrowers.
At SEEDS Fincap, we believe that technology should support human judgment rather than replace it. Data can provide signals, but ground-level understanding only provides real insight. Our branch-led and technology-enabled model allows us to combine both approaches. Continuous field presence of our sales officers help verify actual business activities of potential customers. Deeper engagement with those potential customers by field staff from operations and credit teams improves credit decisions and helps keep credit risks under control.
Another important issue in MSME lending is loan structuring. Many small businesses may require flexible repayment schedules. It is often observed that the cash flow of these enterprises depends on suppliers, buyers, and seasonal factors. If the repayment schedule does not align with the business cycle, it can create financial pressure.
Good lending, therefore, involves providing the right loan amount with an appropriate repayment structure. At SEEDS, during the credit appraisal process itself, with the help of industry best practices, right loan amount is determined based on the specific facts and circumstances of each client. It ensures that repayment remains well within the borrower’s capacity.
Another important area of concern is women-led businesses. The number of women entrepreneurs is increasing steadily. However, many women do not own assets that can be used as collateral, in case of secured loans. In some cases, it is found that, Women are entirely new to formal credit systems, having no credit score record available. Their business networks may also be relatively smaller. In such situations, lenders need to design systems that support women borrowers. Handholding is particularly important for those first-time borrowers.
At the same time, lenders must also protect portfolio quality. Any haphazard or emotional lending can create problems later. It can harm both borrowers and lenders in long term. Therefore, financial inclusion must always go hand in hand with responsible lending.
It is important to understand that the MSME credit gap is not solely about the availability of money. It is about improving lending models. Lenders must estimate the actual cash flows of businesses. Loan structuring should be based on real, in-person interaction and must align with business cycles. This also means that monitoring and governance must remain strong during both loan origination and loan management.
MSMEs do not need easy credit. They need fair and well-structured credit. At SEEDS, our focus is clear. We believe in responsible lending and balanced portfolio growth based on a deeper understanding of small businesses.
<p>The post The Credit Gap in MSMEs: What Still Needs to Be Solved first appeared on Hello Entrepreneurs.</p>
