Understanding the Key Reasons Behind MSME Credit Gap

As per recent surveys, India is home to around 75 million MSMEs, which rake in almost one-third of the national GDP. One of the biggest challenges faced by these enterprises is the availability of reliable and quick credit facilities.

What and how is the credit gap plaguing Indian MSME sector?

A credit gap, in simple terms, is nothing but the gap that exists between the demand for finance and the actual credit availability. For MSMEs, the credit gap is determined by considering the availability of formal finance. Although informal sources of credit are available to these small enterprises, they are often peddled at exorbitant interest rates.

Only around 10% of the total MSMEs operating in India have access to sources of formal credit.

Therefore, without the availability of formal credit, MSMEs are financially crippled to operate. The credit gap can often prevent smaller companies from sustaining themselves, leading to the closure of business and loss of employment.

While financial institutions are ready to offer an MSME loan to eligible applicants, a few problems prevent these enterprises from turning up to lenders for financial assistance.

Why does the credit gap exist?

One can point out several minor reasons for the existing credit gap. Nevertheless, four factors primarily result in MSMEs failing to secure the necessary finances from official credit sources.

These are –

Improper record maintenance

Several MSMEs in India fail to maintain transparency in their operations. They may lack important financial documents, such as transaction history, P&L and even tax return filings. These are some of the most crucial necessities to avail an MSME loan.

With zero insight into these aspects, lenders are unable to gauge the financial situation of a company, which leads to rejection of the credit applications. They also lack the ability to gauge the creditworthiness of the borrower, which amplifies their lending risk significantly.

MSMEs employ more than 110 million Indians.

This sector is responsible for almost 45% of the country’s manufacturing output.

Such complications often leave these enterprises without a scope to utilize the benefits of MSME loan.

Lack of assets to leverage

Even when a company lacks the documents required for business loans, NBFCs can sanction funds based on the worth of assets that can be hypothetical. Unfortunately, MSMEs in India do not possess assets of value in most cases, preventing them from availing secured credits as well.

Formal financing solutions, such as an MSME loan, covered only around 16% of the Rs.69 lakh crore debt demand of MSMEs in the country.

With no asset to collateralize, such businesses have no way to offset the significant risk to lenders in the event of credit disbursement.

Complicated documentation process

Most business leaders today follow a convoluted documentation procedure, which can create additional problems for MSMEs. The long list of documents that companies need to submit at the time of loan application can be stressful.

Moreover, not all organizations can arrange these documents, leading to a complete mismatch of what is required and what micro, small, and medium enterprises (MSME full form) can provide. Before you can organize your business finances through these credits, in-depth knowledge about their documentation procedure is vital.

Some lenders, such as Bajaj Finserv, maintain a simple documentation process for their Business Loans. This allows for hassle-free applications whenever capital is necessary.

The NBFC also provides pre-approved offers, accelerating and simplifying the application procedure further. These offers are available on a range of financial products, including business loans, personal loans, etc. You can check your pre-approved offers by providing your name and phone number.

Delayed disbursements

Financial institutions may take weeks to process an MSME loan application. This is a prolonged period for these smaller companies to sustain themselves, without access to financial aid. These organizations may need immediate access to funds to meet emergency expenses, such as paying staff salaries and more.

Is digital lending the answer to this credit gap?

Like most products and services, business lending has also shifted to digital means today. Thanks to a multitude of digital data collection procedures, it is simple for NBFCs to collate financial and tax information of a business than it was ever before.

Additionally, data analytics, AI and machine learning are some of the other digital facilities that should aid MSMEs secure credit from formal sources.