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Digital Lending to MSMEs: Ecosystem, Challenges & Potential Solutions

India has 51 million SMEs contributing 37% of the non-agricultural GDP and employing 40% of the workforce. While they are heterogeneous in their organizational form and offerings, they share a common challenge; the availability of formal financing to the sector has not been commensurate with the importance it holds for the economy. According to the Transunion - CIBIL MSME Pulse Report, only about 5 million out of 51 million SMEs have access to formal finance. This is owing to several factors; fragmented/incomplete financial data that informs lending; inability of formal lenders to lend below a ticket-size given the (fixed) costs of due diligence; incomplete credit infrastructure coverage as credit bureaus cover a minor fraction of MSMEs and inflexible payment options. A study authored jointly by Omidyar Network and BCG (The MSME Study) just this week suggests that 40% of the MSMEs are constrained to borrow from informal sources at interest rates that are on average 2.5 times what formal sources would charge.

The Macro-Environment

In terms of the macro-enviro ...

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