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MSME lending: Why this alternate route for credit underwriting is the need of the hour

Sandeep Soni

Lenders to micro, small and medium enterprises (MSME) typically rely on publicly available data such as government's data repositories, IT filing reports, etc. to underwrite as per flow-based lending. This is the primary challenge for MSMEs as they have low data available to prove their creditworthiness. Hence, it prevents most micro and small enterprises from coming into the ambit of formal lending. “Microenterprises, since they typically fall in the bulging bottom of the business pyramid, receive the lowest share of credit through formal lines. So, they have to turn towards informal lenders that charge exorbitant rates and have unreasonable terms,” Manish Khera, Founder and Managing Director at the digital lending platform for micro and small businesses Happy told Financial Express Online.

Happy instead of going for the said data sources, look for alternate data through unconventional channels such as the remittance data of a microenterprise. This data, claimed Khera, is secured in real-time via channel partnerships with remittance players such as POS vendors, mobile wallet companies, e-commerce platforms, etc. “Over 52 per cent of our overall borrowers are new to formal credit. Any microenterprise that is associated with our channel can easily access low-cost credit via Happy in less than a minute, thereby solving the prevalent market challenge,” said Khera. The company has partnered with more than 20 merchant aggregators and has access to over 2 million microenterprises in over 400 locations in India.

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Micro loans are imperative for an all-encompassing economic growth of the country as the biggest taker of such loans is the MSME sector, which consists of over 6.34 crore operating units, that generates employment for more than 117 million people -- 40 per cent of the nation’s active workforce. “If India envisions to arrive at the centre-stage of the ripe global market, the MSME segment, which virtually survives on small-ticket loans, will have to play a pivotal role. It can generate a wealth of over Rs 200 crore for the Indian economy in a span of just half a year,” said Khera.

Microloans in a way serve as a lifeline for micro-enterprises as they enable them to meet their working capital requirements and eliminate financial challenges that they experience on a day-to-day basis with greater flexibility. It also enables them to tap time-bound market opportunities and experience superior growth. “Every loan cycle boosts borrower’s turnover by 20 per cent. It has the potential to grow the merchant’s business turnover twenty-fold in just 1.5 years. Such loans make them more financially stable and ensure that they continue to grow their business, improve their lifestyles, and generate greater employment for the nation,” said Khera. The current demand for lending to small business or microlending segment stands at Rs 16.66 lakh crore according to a report by IFC-Intellecap.