BLinC Invest MSME Lending Report 2022 says credit gap of INR 25 Tn in the MSME sector that can be potentially addressed through emerging business models

Highlights of the report

● With more than 63.4 million MSMEs in the country, the MSME sector contributes to ~30% of the GDP of the country employing ~111 Mn people amounting to ~25% of the working population

● While quarterly MSME disbursements have grown 2x over the last 2 years, majority of the growth has happened on account of increased penetration in Tier 3/4 cities and this can be grown significantly with improvements in credit underwriting policy and processes

● The sector has a total demand of ~INR 69.3 Tn with less than 15% of the demand being catered to by the formal lending segment. The sector is expected to witness increased participation from private sector banks and NBFCs along with technology enablement

● Proactive government initiatives such as MUDRA, TReDS, India Stack, AEPS, Account Aggregator, Open Network for Digital Commerce (ONDC), Open Credit Enablement Network (OCEN) etc. have helped increase formalization of the MSME segment and fast-tracking the growth

● Four business models have been identified as white spaces which have a large opportunity – Anchor-based supply chain finance, POS financing, NBFC with branch network and Embedded finance

India, December 15, 2022 – BLinC Invest, Mumbai-based VC firm launches its first MSME lending research report. The firm has taken a business-model first approach instead of a financing vehicle or a product approach to gather insights into the MSME space. The primary research methodology included on-ground visits and telephonic interviews with MSMEs across 15+ states in the country and interviews with key industry leaders in the financial services sector. This was supplemented with various secondary research data. The study also deep dives into the various business models and identifies the 4 major constraints to accessing formal credit in India for each of the business models, i.e., expensive access to capital, Penetration and Acquisition, Underwriting and Collections

The Indian MSME sector comprising 63.4 million MSMEs, contributes 30% to India’s GDP. The MSME sector has a total credit demand of INR 69.3 trillion, growing at a CAGR of 11.5%. with less than 15% of the demand being catered by formal sources. The report identifies the key opportunities while proposing business models best suited to cater to this demand.

The 5 states that account for 50% of total MSMEs in India are Uttar Pradesh (highest number of MSMEs in India ~9Mn), West Bengal, Tamil Nadu, Maharashtra, and Karnataka.

While quarterly MSME disbursements have grown 2x over the last 2 years, this is primarily on account of increased credit penetration and not on account of additional risk taken by the financial institutions. This is indicated by the fact that approval rates for the medium risk tier segment have remained unchanged, hovering around 30%-35%, for private banks in the last one year and have decreased for PSUs and NBFC over the last 2 years.

The report highlights 9 business models such as payment gateways/QR code, POS financing, Neobanks, P2M Lending, anchor-based supply chain finance etc. which paved the way for the development of the MSME sector. The total funding garnered into this sector stands at ~$5.5 Bn for the period 2016-2021 with majority of the funding received by neobanks, NBFC with branch network, payment gateway/QR code business models.

As quoted by Amit Ratanpal, Founder & MD, BLinC Invest says, “Businesses need funding to grow. The MSME market is largely underserved in terms of financing and solving this huge credit gap is critical to growing the Indian economy as a whole. The market lacked a comprehensive MSME lending report, which not just highlighted the gap but also understood key pain points to propose business models that will solve the problem. We hope the report will encourage investment and innovative ideas that will provide this key sector the much-needed funds to grow their businesses.”

He also adds, “The report digs deep into recognizing MSMEs’ opportunities from the Indian & global perspective, the existing gaps of underserved credit, the urban/rural cities where the opportunities lie, and the successful models for providing credit. Our research findings state that a solid business model and stable funding can help the MSMEs address the backdrop and grow their business.”

The report highlights four white spaces – POS Financing, Anchor-led Supply Chain Finance, NBFC (with branch network), and Embedded Finance. It shares data on key points such as penetration and growth, VC/PE activity, maturity level and BLinC Invest insights.

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