India’s small digital businesses have a capital problem and this will only grow

• The overall credit demand stands at $220 billion, yet only $165 billion is serviceable, says a report by Redseer and GetVantage.
• Formal lending systems like banks have only been able to service 30% of the overall credit demand.
• Alternate finance systems like recurring-revenue advances and trade receivable financing have the potential to double their share in five years.
  

Indian digital small and medium sized enterprises (SMEs) are on a growth path but suffer from a working capital deficit of around $112 billion — as only $53 billion was injected via various channels. As per a report by Redseer and GetVantage, the overall credit demand stands at $220 billion, yet only $165 billion is serviceable.

“Small businesses account for 90% of credit demand but continue to struggle to raise capital, owing to poor business metrics, limited assets, and uncertain growth projections. If the current economic and regulatory climate continues, this gap is likely to widen significantly over the next five years,” said Kanishka Mohan, partner at Redseer.

Moreso, as more businesses go digital along with growth in new-age businesses, the demand for credit will only grow. The report estimates that in the next five years, as the number of digital SMEs doubles, the demand for credit is expected to cross $570 billion.

Advantage Alt-Fi

Formal lending systems like banks have only been able to service 30% of the overall credit demand. Lack of collateral and clear documentation has always been a hindrance for traditional lenders such as commercial banks to provide adequate capital to SMEs.

That presents an unprecedented opportunity for alternate-financing platforms, NBFCs and traditional financial lenders (Trad-Fi) like banks to collaborate and catalyze economic growth by prioritizing compliance, governance, inclusion and innovation, opines Bhavik Vasa, founder & CEO of GetVantage.

Alternate finance systems include third-party lenders such as revenue-based financing platforms, recurring-revenue advances and trade receivable financing etc. Alternate-finance provides access and flexibility which make these quasi-equity solutions ideal for SMEs.

“India is a nation of small businesses, and modern businesses in India deserve modern capital solutions that are fair, accessible, and flexible. Alternate-financing has a vital role to play in extending the limited reach of traditional lenders to serve millions of new-economy businesses and emerging sectors,” says Vasa.

At present, the share of alternate finance is around 5%, which Redseer estimates can double to reach to around 11% in the next five years.

India has 64 million micro, small, and medium sized enterprises (MSMEs), which contribute to 30% of the nation’s GDP. The sector which is recognized as a crucial growth engine is riddled with challenges such as limited digitization and strained access to capital.

Redseer says that only 12% or 7.7 million MSMEs in India are digitized. Yet, businesses that have been able to shift their operations online partly have been able to achieve scale as they could take advantage of new economic opportunities and cost efficiencies.