MSME

How The Liquidity Crisis Has Hit The MSME Sector

The fact that the MSME sector forms the fundamental growth driver of the nation has been repeated time and again, and for all the right reason. This sector alone accounts for 45% of the total manufacturing output and 40% of the exports.

Another fact that manages to outperform the statistics above is that the MSMEs in India is undergoing a massive credit deficit phase. A recent report by the International Financial Corporation (IFC) reveals that the Indian MSME sector is currently looking at a credit gap of $240 billion. The World Bank estimates a credit gap of $380 billion in the Indian MSME landscape.  

What makes the situation worse is the fact that the credit gap has significantly swelled up in the past 5 years. IFC conducted a similar study in 2012 where the credit gap was around $200 billion. 

Till date, only 16% of MSMEs are financed by the formal financial institutions. This implies that almost 80% of MSMEs struggle to get financing from traditional lending institutes.

Despite having an incredible growth rate of over 10% in the past couple of years, the MSME sector is plagued with credit issues. Additionally, with NBFC defaulting cases on the rise, MSMEs continue to face the wrath of the credit crisis.

Why Does This Gap Exist?

MSMEs are small enterprises that are affected by many impeding factors. These MSMEs lack credit score and substantial assets to keep as collateral, and hence has to undergo a credit crunch. 

However, a closer look into the MSME ecosystem will reveal that getting financing isn’t the only pain point; there is a vast economic gap due to delayed payments. The study conducted by IFC further shows that around 70-80% of the working capital financing gap versus delayed payments can be closed if large corporates paid SMEs on schedule, that is within 45 days. 

What aggravates the loaning situation is the recent liquidity crunch due to the past default cases of NBFCs, which translates nothing short of a crisis. However, the collateral impact it had on the MSME sector was far worse than expected. 

Since MSMEs largely depends on NBFCs as an essential mode to avail funds, the sector had to take the hit. NBFCs primarily depends on bank borrowings and commercial business paper to source resources. However, when the crisis hit NBFCs the trust of the banks hit a low and they wouldn’t lend money to them. 

When NBFCs couldn’t raise funds, they stopped providing loans resulting in lack of working capital for SMEs leading to a severe liquidity crisis.

The Solution:

The MSME community has for long been hindered by economic, institutional, and cultural bottlenecks. Considering the current financial challenge that poses in front of the sector, no one tool, process, or methodology is going to bridge the credit gap and provide a nurturing environment to the MSMEs. And, this is where alternative digital loaning solutions offered by new-age fintech companies come to the rescue of the MSMEs. 

Fintech companies leverage innovative technologies, data analytics, and underwriting algorithms to create a vast pool of data points. Such in-depth analysis allows fintech players to create and assess the borrower’s profile based on the collected data, granting seamless access to credit. One of the most potent new-age digital loaning methods is invoice discounting that can provide quick relief to cash-strapped MSMEs. 

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