In India, acquiring funds promptly is a challenge commonly faced by most small and medium-sized businesses. The MSME sector in India is a cornerstone of the economy, contributing ~30% to the country’s GDP. In addition, exports from MSMEs have seen substantial growth, rising from INR 3.95 lakh crore in 2020-21 to INR 12.39 lakh crore in 2024-25.
The sector faces a notable credit gap, presenting challenges and opportunities for financial institutions (FIs) and fintech companies to collaborate and create value. Addressing this credit gap is crucial for unlocking the MSME sector’s growth potential. Traditional lenders have lengthy loan processes with extensive paperwork and collateral requirements, which eventually hinder growth opportunities. Digital lending platforms, conversely, offer faster and convenient funding solutions.
SME loans help entrepreneurs manage working capital, purchase equipment, or expand operations nationwide. The inception of digital lending platforms has streamlined the borrowing process, making it efficient and less cumbersome for business owners.
How does the digital lending process work in India?
Digital lending platforms use technology to aid the lending process:
- Online application: The Loan application process becomes extremely easier with the help of user-friendly dashboards or smart mobile applications, eliminating the need for physical visits to the branch.
- Automated credit assessment: Credit scores are obtained using advanced algorithms and alternative data sources, such as transaction history, profit and loss statements, and a forecast of business performance. As the data source is automated, business owners with limited credit history can also access much-needed credit.
- Quick approvals and disbursements: Automation enables obtaining rapid and accurate data, making the credit decision easy and speedy, at places, within minutes. Further, quick approvals and credit assessment expedited the disbursement process.
- Tailored repayment options: The digital lenders have introduced tailored repayment terms that align with the business’s needs and business cycle.
Benefits of digital SME lending for Indian businesses
- Enhanced financial inclusion: Digital lending platforms have democratised lending in India, ensuring that the hitherto underserved segment also receives access to credit. By considering alternative data sources, assessing and approving loans has also become broad-based.
- Cost efficiency: The smaller number of physical branches has ensured savings in overhead costs. It enables the digital lending platforms to provide competitive benefits like reduced interest rates and lower fees, resulting in significant savings for the borrowers.
- Customised loan products: While focusing on SMEs, the focus is to provide capital and interest rates that meet the requirements of the business. Digital platforms have multiple products tailored to meet the diverse needs of Indian SMEs, providing flexible repayment options and quick disbursements.
- Improved customer experience: A highly streamlined SME lendingigital lending process makes the borrowing experience convenient compared to traditional lending methods.
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Government initiatives introduced to support digital SME lending in India
The Government of India has introduced multiple schemes to strengthen SME growth and the digital lending process for loans for them:
- Under Pradhan Mantri Mudra Yojana (PMMY), MUDRA Loans provide collateral-free loans of up to INR 10 lakh to micro and small businesses.
- Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)offers credit guarantees to financial institutions, motivating them to provide collateral-free loans to SMEs.
- PSB Loans in 59 Minutes is an online portal that provides quick approval of loans up to INR 5 crore for MSMEs.
Digital SME lending platforms offer convenient financial solutions that enable entrepreneurs to seize growth opportunities and navigate market challenges effectively. As the digital lending ecosystem continues to evolve, SME loans promise greater financial inclusion for MSMEs.
Views Expressed By: Mr. Sathiayan Jaichandran, Chief Business Officer – Emerging Market Business, UGRO Capital
