The key to eliminating the MSME finance gap in emerging markets

While some experts believe survival will remain the top priority for micro, small, and medium-sized businesses in 2023, others believe the year will be better, at least in terms of credit expansion. From what we've seen it has been a bumpy ride for MSMEs. In 2022 we got to see MSME concerns like low demand, shrinking margins, piling up inventories and most of all, rising interest rates.


In India, the MSME sector is mostly engaged in the service, manufacturing, processing, production and preservation of commodities. Considering that the almost 6 crore-plus MSMEs account for nearly 50% of all exports and nearly 30% of the country's GDP, it is clear that they are the foundation of the Indian economy.


In India, MSMEs are mostly located in rural and semi-urban areas and they help in maintaining the regional economic balance and the much-needed employment opportunities. Experts have also expressed that the growth of MSMEs is extremely crucial in fulfilling India’s target of becoming a $5 trillion economy by 2025.


MSMEs contribute to the preservation of the regional economic balance and the creation of desperately needed job opportunities. Experts have also stated that in order for India to reach its goal of having a $5 trillion economy by 2025, MSMEs' growth is absolutely essential.


The bad news is that access to financing has been and continues to be a major obstacle for SMEs to launch, maintain and expand their operations. To start and run their business initially, about half of formal SMEs rely on internal capital or cash from friends and family rather than formal credit from banking and other financial institutions. According to research, 131 million formal SMEs have unmet financial needs. And creating opportunities for SMEs is necessary to spur economic growth and end poverty in emerging nations.


The good news is that Digital Financial Services (DFS), or the supply of financial products and services via digital channels, have become a crucial tool for helping small and medium-sized firms close the financing gap. These technological innovations serve as the foundation for the development of new business models and digital financial products, which include digital loans and other credit products, as well as equity capital. Digitisation has the potential to revolutionise MSME funding. The rising prevalence of mobile phones in developing nations is expanding the digital financial services that are available to MSMEs and advanced data analytics and digital financial products are assisting these largely unorganised businesses in establishing a credit history that will open the door to formal financing.


To top it off, informal organisations can now register, operate legally, and meet regulatory requirements for client identity and verification thanks to digital payroll systems and forms of identification. Additionally, internet platforms give business owners access to a variety of finance alternatives that they otherwise wouldn't have had.


The digital transformation of MSMEs also lowers transaction costs for the lenders and banks that serve them. The greater their digital footprint, the more MSMEs appeal to technology-focused SME lenders that can use data to decrease the costs related to loan origination and collection, thereby increasing the profitability of serving the MSME market. More traditional lenders like banks can also benefit from advances in analytic and processing capabilities, which fuel data-driven intelligence that can inform their initial decision-making and portfolio management.


That being said, the MSME community in India has grown by leaps and bounds and is slowly defining its route to recovery following the pandemic. While there are many factors that can be attributed to the government's policy initiatives and creative financing options, technology and the rise of social commerce have been the real game-changers, assisting them in resolving problems, finding new markets, managing regulatory compliances, and overcoming logistical difficulties to spur real business growth.


But there's a lot more to it than just digitisation. For more, ensure to tune into BI India's two-day MSME Exchange on January 18-19. We are back with the third edition of MSME Exchange – India’s leading MSME summit, powered by our knowledge partners NASSCOM & BSE SME Council. You will get to witness leading change-makers, regulators and experts discuss problems and potential solutions that will influence the MSME sector for decades to come.


[Register here: https://www.businessinsider.in/msme-exchange-2023 ]