Micro, small and media enterprises (MSMEs) are considered an engine of growth in developing economies worldwide, and India is no exception. There are an estimated 50 million MSMEs, employing some 100 million people, across India. The sector accounts for 37 percent of the country’s GDP. And yet, MSMEs face a major gap when it comes to accessing credit — more than 90 percent have not accessed credit of any kind. This is why it’s so crucial to foster those Bridging the Small Business Credit Gap Through Innovative Lending.
Three of Accion Venture Lab’s portfolio companies in India are using fintech innovations to provide capital to MSMEs. Aye Finance is a New Delhi-based non-bank financial company focusing on targeted small industry segments — or clusters — to better identify, engage, and lend to MSME clients. Based in Bangalore, Varthana lends to affordable private schools teaching children from low- and middle-income families. Beyond the infrastructure and project loans, Varthana also provides non-financial services to help these schools grow and improve their infrastructure and quality. Finally, SMEcorner has launched a proprietary online platform through which small businesses can apply for unsecured working capital loans.
Each of these Indian companies saw a market opportunity where others might simply see a difficult to serve segment. SMEcorner has introduced its own loan products: the “Biz-e-loan,” tailored to address immediate cash flow issues, and unsecured business loans for longer-term working capital needs. Applicants use a simple online application form and can be approved within days, making it an attractive option for newer or smaller businesses.
In Varthana’s case, they saw a growing group of entrepreneurs creating their own neighborhood schools, but unable to access funding to improve their quality or efficiency without capital. The schools exist to fill the need for more and better school options — there are estimated to be more than 250,000 private schools in India serving over 100 million students with fees as low as a few dollars per month, part of a growing US$12 billion industry. These entrepreneurs are typically not able to access loans from traditional financial institutions like banks or MFIs as their schools do not resemble a typical business. Recognizing the size of the industry and the value of well-run schools, Varthana is singularly focused on serving private schools. This specificity of its mission has allowed Varthana to not only develop a strong relationship with school entrepreneurs but also to provide additional services, such as capacity building and connection to vendors and solution providers.
Finally, Aye Finance focuses on specific industry clusters, like small-scale manufacturing, trading, and services businesses, which cannot access capital from mainstream financial institutions in India, as they lack sufficient documentation and credit history. Other lenders generally do not have a good understanding of the business dynamics and risks unique to these industries. Aye sets itself apart by focusing on specific industry clusters and thereby gaining a deep understanding of the supply chain. This allows Aye to not only build its client base and make appropriate lending decisions but also to facilitate connections within an industry cluster’s supply chain and provide advice to enhance business owners’ management skills and financial literacy.
Similar to the MSMEs they serve, innovative lenders are in need of support, whether in the form of advice and mentoring, well-targeted research, more conducive regulatory environments, or capital investment and debt financing. One well-known initiative the country is undertaking is IndiaStack, the largest application programming interface (API) in the world, which allows entrepreneurs, consumers, and the government to interact with each other transparently. IndiaStack, while not a magic solution to all MSME finance challenges, is proving to be useful in helping some firms reduce transaction costs, increase transparency, and improve service to MSME clients in other ways. Large-scale efforts like this, that engage the public and private sectors, will be key to narrowing the MSME funding gap in India, and worldwide.
This article is part of our global series on MSMEs in seven key countries where we work. Read the paper Bridging the Small Business Credit Gap Through Innovative Lending.