The Indian MSME sector contributes about 29% to the GDP and employs around 110 million people across the country. However, the sudden outbreak of pandemic turned everything upside down leading to an economic unrest across the country. The pandemic has been especially brutal for the MSME sector owing to the severe liquidity crunch. As the MSME sector struggled hard to stay afloat, financial turmoil seemed to be an impediment too difficult to overcome.
The government subsequently came up with a slew of measures to aid financially stressed sectors. Measures such as increased emergency credit line guarantee to businesses, subordinate debt schemes, and Funds of Fund schemes came as a huge relief as the sector stared at what seemed to be a never-ending crisis. The country also witnessed a growth in finance startups that came forward to lend financial support to MSMEs with unsecured loans. Financial institutions lending unsecured loans have emerged a savior for MSME companies in times of distress.
Listed below are some of the ways in which informal lending institutions can contribute to the revival of the MSME sector.
1. Collateral-free loans will help inject liquidity into the sector
Though small businesses are the engines driving economic growth, business financing problems keep them from unlocking their full potential. And with the pandemic coming as a sudden blow, the MSME companies only found themselves drowning into bigger debts. Securing a loan is especially difficult for small businesses as they have no valuable asset to offer as a collateral. This is where finance companies offering unsecured loans can be a major relief. With flexible terms that don’t mandate MSMEs to submit a collateral, finance companies can inject liquidity into the sector and save MSME companies from going through the ordeal of procuring expensive assets amidst a crisis.
2. A fast tracked disbursal process can reinvigorate cash-crippled businesses
An urgent need for funds often remains unfulfilled owing to long-drawn loan application processes. By the time the loan application gets approved, companies may have lost a crucial opportunity to expand or scale their operations. A fast tracked process that prioritizes customer experience can help MSMEs get going with least hassles. Access to quick capital is absolutely critical for MSME growth and newly emerging finance companies can revive the sector with speedy disbursement of loans. Minimal paperwork and speedy document verification will encourage small businesses to apply for loans and get their business up and running quickly.
3. Customized loans can accelerate economic recovery
Finance companies offering unsecured loans can offer customized plans to suit small business needs. Such customized loans will be a savior for businesses in need of funds for planned or emergency purposes. Customized loans are those tailored to meet the specific needs of a borrower. Finance companies offering unsecured loans can tailor their loan products after analyzing specific borrower demands so small businesses can enjoy greater flexibility. This will prove to be a firm step towards addressing the credit gaps in the MSME sector.
4. Digital lending would ensure access to broader range of services
The RBI has urged digitisation of MSMEs so the sector stays competitive and relevant. Subsequently, digital lending by finance companies can provide a major filip to the MSME sector. Online loan application, digital exchange and verification of documents would be a game changer for small and medium enterprises as businesses across geographies would be in a position to avail quick loans. The MSME sector is in dire need of some easy and affordable financing solutions and finance companies with digital lending facilities can ensure access to a wide range of financing options to choose from under one roof.
5. Less stringent qualification process can be a breather for MSME segment
Traditional lenders usually need to be convinced of a good credit history before they can sanction loans. But small businesses usually don’t have an impressive credit history to display owing to numerous reasons. Finance companies with less stringent loan eligibility terms can save MSMEs starved of opportunities to finance their business. There are numerous finance companies offering small business loans for working capital requirements, asset purchase or expansion plans despite average credit history. Seeking financial aid from such companies can resolve a host of financial problems crippling the MSME sector.
As MSME earnings got severely impacted by the pandemic, easy financing options are undoubtedly the need of the hour. Finance companies offering unsecured loans can enable seamless capital flow for MSMEs, thereby strengthening MSMEs reeling under the pressure of adverse cash flows. MSMEs must explore and leverage lending options by informal lenders so they emerge stronger in the future. With India becoming a hotbed of finance startups offering flexible lending terms, the road ahead for MSMEs definitely looks promising.
Views expressed in this article are the personal opinion of Alok Nag, Founder, A&H Capital.