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Alternate financing poised to capitalise on $570 bn SME credit opportunity

India is home to 64 million micro, small and medium enterprises (MSMEs), contributing 30 per cent of the nation's GDP

MSME ministry likely to streamline existing schemes for better results

Peerzada Abrar Bengaluru

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In the coming five years, the demand for credit is forecast to exceed $570 billion as the number of digital small and medium enterprises (SMEs) doubles, according to the India Digital SME Credit Report 2023. This report, published by alternate-financing platform GetVantage and Redseer Strategy Consultants, reveals a potential $220 billion credit deficit that could obstruct the economic potential of millions of digitised businesses. Of the existing $220 billion requirement (as of financial year 2022), Redseer analysts estimate that $165 billion is serviceable when adjusted for sick and commercially unviable enterprises. Even with an infusion of $53 billion into the market in FY22 through various channels, the current working capital deficit remains at $112 billion.

“Small businesses make up 90 per cent of credit demand but continue to find difficulty in raising capital due to poor business metrics, limited assets, and uncertain growth projections,” stated Kanishka Mohan, Partner at Redseer. “Should the present economic and regulatory climate persist, this gap is poised to expand significantly over the next half-decade.”

The Internet and Mobile Association of India partnered with the report's authors.

India is home to 64 million micro, small and medium enterprises (MSMEs), contributing 30 per cent of the nation’s GDP. Despite the sector's vital role in India's growth, it faces considerable challenges such as limited digitisation and restricted access to capital that hampers growth. Redseer analysts note that roughly 12 per cent or 7.7 million MSMEs in India are digitised. Those businesses that have partly transitioned their operations online have managed to capitalise on new economic opportunities, cost efficiencies, and scalability.

Raising capital has historically been a struggle for SMEs, with formal lending systems of public and private banks servicing only 30 per cent of the overall demand, according to Redseer. This shortfall has opened substantial opportunities for non-banking financial companies (NBFCs) and third-party lenders, such as revenue-based financing platforms and trade financiers, to cater to the burgeoning market. As a result, 40 per cent of total capital investment into the SME market has flowed to digitised SMEs (12 per cent of total MSMEs).

Bhavik Vasa, founder and CEO of GetVantage, noted that “Alternate financing plays a crucial role in extending the limited reach of traditional lenders to serve millions of new-economy businesses and emerging sectors. The $570 billion credit requirement for digital SMEs in the next five years represents an unparalleled opportunity for Alternate-Financing platforms, NBFCs, and traditional financial lenders like banks to collaborate and spur economic growth by prioritising compliance, governance, inclusion, and innovation.”

Currently, alternate finance holds a 5 per cent share, a figure that Redseer anticipates could double to 11 per cent in the next five years, driven by alternate-financing platforms fostering higher market awareness. According to Redseer's analysts, traditional lenders like commercial banks have consistently faced obstacles in providing sufficient capital to SMEs due to the lack of collateral and clear documentation. Alternate-Finance (Alt-Fi) has emerged as a vital support for SMEs, where innovative lending models, such as revenue-based financing, recurring-revenue advances, and trade receivable financing, are offering unparalleled access, flexibility, and transparency to small businesses.

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First Published: Aug 24 2023 | 6:41 PM IST

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