Digital lending to micro, small and medium enterprises (MSMEs) in India can grow 10 to 15-fold by 2023 to Rs 6-7 trillion ($80-100 billion) in annual disbursements, said a joint study by philanthropic investment firm Omidyar Network and Boston Consulting Group (BCG).
The India MSME opportunity is driven by three major shifts.
First, the government-led 2016 demonetisation, Unified Payments Interface launch, and 2017 Goods and Services Tax have positively impacted MSME formalisation and digitisation. Saurabh Tripathi, senior partner and director and Asia-Pacific leader, financial institutions practice, BCG, said, “Easier and cheaper credit through digital lending has the potential to trigger a virtuous cycle for formalisation: Up to 85% of MSMEs could be formal by 2023.” Also, telecom competition since 2015 has led to a dramatic increase in connectivity, with a 95% drop in data costs, eight-fold increase in MSME data consumption, and increased MSME smartphone adoption.
Second, near end-to-end digital MSME lending has become a reality, with loan approval time period as short as one day.
Finally, the increased receptivity to digital lending by MSMEs indicates the large scale of the potential market. More than 40% of MSMEs are more receptive to digital lending. More than 75% of MSMEs report they are comfortable sharing data digitally, and over 60% expect to have significant digital payments in the next three years. This digital data stream provides lenders with critical information they can use to make lending decisions.
According to the study, a range of entrants and business models can successfully tap the MSME lending market in India as the country boasts a largely level playing field and no dominant incumbents.
Roopa Kudva, partner at Omidyar Network and managing director of Omidyar Network India Advisors, said, “In 2018, most of the credit demand for $600 billion (Rs 45 trillion) is being met through informal sources.” Roughly 40% of that demand will be served by informal credit, with interest rates
at least twice as high as formal credit. An additional 25% of MSME borrowing is invisible — through personal proprietor (rather than business) loans, demonstrating the shortcomings of the current lending market, the report said. Tripathi said, “With almost 60% of MSMEs borrowing informally today, MSME lending is set for disruption with massive growth in formalisation and digitisation.”
The report highlighted that India’s 60 million MSMEs –or businesses with annual revenue up to Rs 250 crore ($35 million) – make an impressive contribution to the country’s gross domestic product (GDP). But MSME contribution to India’s GDP is nearly 10 percentage points lower than in the United States and 23 percentage points lower than in China.