MSME Financing in India: Making it Easy, Accessible & Affordable

The contribution of Micro, Small and Medium Enterprises (MSMEs) to Gross Domestic Product (GDP), job creation, and balanced economic development is well-established. There are more than 55 million MSME enterprises in India, contributing to around one-third of India’s GDP and almost 43% of our exports. However, the lack of adequate, timely, and affordable access to credit has remained the biggest challenge for these enterprises to grow.

It is estimated that around 40% to 65% of MSMEs in emerging markets are either underfunded or not funded in the first place, by the formal financial sector. There have been various efforts and policy measures across developing economies and emerging markets, particularly focused on establishing robust financial infrastructure, and innovative financing mechanisms for MSMEs. Credit Guarantee Scheme (CGS) is one such policy intervention for addressing these market imperfections.

Globally, these schemes have played an invaluable role in promoting financing and development for MSMEs. The Korea Credit Guarantee Fund (KODIT), a public financial institution established in June 1976, is one of the largest credit guarantee agencies in the world, with outstanding guarantees of over USD 41 billion – this dovetails well with the growth of MSMEs in Korea, wherein they account for 99% of all enterprises and almost 48% of total national production. The credit guarantee corporation of Malaysia, established in 1972, has also supported the Malaysian economy and MSMEs over the years, with credit guarantees of over USD 15 billion. There have been other prominent examples from Thailand and Indonesia as well, using CGS as an enabling policy tool for easing the financial constraints of MSMEs.

In the Indian context, the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) was established in July 2000, jointly by the Ministry of MSME, Government of India and Small Industries Development Bank of India (SIDBI).

In the last 18 years of its existence, CGTMSE has established itself as an important institution in facilitating the flow of credit to MSMEs. Over these years, CGTMSE has been instrumental in providing guarantee cover worth INR 1.76 lakh crores, covering 35 lakh guarantees, extended by its Member Lending Institutions. The Trust crossed a significant milestone in FY 2019 by enabling 4.35 lakh guarantees with an aggregate loan amount of ~INR 30,000 crores.

CGTMSE has undergone transformative reforms since 2017 to expand the scope of its schemes to previously uncovered segments like partial collateralized loans and retail trade, and amongst uncovered lenders like NBFCs and small finance banks – this has further created a positive multiplier effect by encouraging banks and non-bank institutions to focus on multiple MSME lending avenues.

Furthermore, a slew of favorable government programs announced in recent years has fostered a more favorable business environment for FinTech models to emerge in the MSME lending space in India. FinTech companies are offering solutions that can substantially improve efficiencies at every step of the lending process.

SIDBI and CGTMSE acknowledge the pivotal role technology can play in further democratizing the credit access. We are encouraged to see that a number of Indian FinTech companies are focused on the MSME sector, and are providing small-ticket loans to entities with limited credit history, through data-driven scoring models and credit assessment. Considering the emerging role being played by new-age FinTech players in the MSME ecosystem, CGTMSE has recently included such FinTech NBFCs, engaged in financing Micro and Small Enterprises (MSEs), in its scheme as well.

A key differentiator has been the use of technology capabilities to bring the entirety of CGTMSE operations online – this has not only enabled it to achieve scale but has also provided enhanced efficiencies and better customer service to its Member Lending Institutions. This would be particularly beneficial for these FinTech entities, as the platform can seamlessly interact with their end-to-end digital lending model and processes.

With this progressive approach of diversifying our product offerings, we are in the process of creating a unique demand-side disruption, letting MSE borrowers directly reach out for an upfront guarantee, in addition to our existing lender lead scheme. This would not only allow CGTMSE to extend its reach to unserved and underserved MSE segments but would also create a sustainable lead-generation platform for Member Lending Institutions, aided by superior technology capabilities.

The CGS Model globally, as well as in India, has successfully demonstrated that it can increase credit flow to the MSME sector by mitigating risk for lenders. With the emergence of alternate lending models backed by technology and analytics, a further impetus has been provided to the digitization of small enterprises themselves. It is, therefore, imperative that we continue to benchmark, re-examine, and re-orient our credit guarantee model to ensure it remains aligned with our strategic objectives in a sustainable manner.

SIDBI, as the principal MSME Financial Institution in India, will continue to be at the forefront of building a vibrant, dynamic and inclusive MSME ecosystem in India. ‘Facilitating Ease, Access, and Affordability for MSMEs,’ would remain our key mantra.