The Transformative Impact of Digitalization on MSME Financing and Access to Credit Although only 12 per cent of India's 64 million MSMEs are digitally mature, the shift to a cashless and paperless ecosystem brings transparency and ease to credit availability.
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In recent years, the rise of digital technologies has reshaped the global business landscape and India's Micro, Small and Medium Enterprises (MSMEs) have been at the heart of this transformation. With over 50 million MSMEs contributing around 30 per cent of India's GDP, the digitization of financing and payment infrastructures has revolutionized their operations. The adoption of digital tools has empowered small businesses to access credit, streamline payment processes and contribute to the growth of the economy. One of the most significant changes brought about by digitalization is how MSMEs access financing. Traditionally, MSMEs have faced obstacles in securing loans due to the lack of formal credit histories and the high operational costs for traditional banks.
As per a report by the Reserve Bank of India, digital lending has led to a 30 per cent increase in loan disbursements to MSMEs over the past two years. FinTech platforms leverage technology to assess creditworthiness using alternative data sources. This shift not only expedites loan approvals but also broadens access to credit for underserved businesses.
Swati Bhargava, co-founder of CashKaro and EarnKaro, emphasizes, "India has 63 million registered MSMEs, contributing approximately 30 per cent to the country's GDP and providing employment to around 111 million people. However, access to finance has historically been a significant challenge for these MSME businesses due to stringent collateral requirements and limited credit history, especially for smaller businesses in semi-urban and rural areas."
She adds, "With digitalization, however, it has become easier for MSMEs to access formal credit, as digital lending platforms now leverage data such as bank statements, transaction history and GST filings to assess creditworthiness. This shift saves time and often results in loan approval within hours or days. With around 70 per cent of MSMEs in India now connected to the internet, they benefit from lower interest rates and real-time tracking of loan applications. This transformation enhances transparency and fosters trust between lenders and businesses, making financing more accessible and efficient."
Pushkar Mukewar, CEO and co-founder of Drip Capital, notes that "Digitalization has been transformative for MSME financing. It has allowed us to break down barriers that have long hindered small businesses from accessing credit."
By leveraging technologies like artificial intelligence (AI) and machine learning, fintech companies can now assess the creditworthiness of MSMEs more accurately. This shift has enabled businesses that were once underserved by traditional banks to access working capital quickly and efficiently. "The result is faster, more efficient access to capital for MSMEs, allowing them to focus on growing their businesses rather than worrying about cash flow," Mukewar emphasized.
Yashwant Lodha, co-founder of PayNearby, also highlights the role of digitalization in enabling financial inclusion for MSMEs in rural and semi-urban areas. Lodha stated, "Many MSMEs in India, particularly in rural and semi-urban areas, face challenges in accessing microloans, microinsurance and other essential banking services. This enables MSMEs to secure loans which were not easily accessible before." This democratized access to credit has empowered small businesses across India, especially in areas where traditional banking services are limited.
"Moreover, government initiatives like the Mudra Yojana have integrated digital platforms into their processes, allowing over 25 million MSMEs to benefit from easier access to credit. By digitizing loan applications and approvals, these initiatives empower entrepreneurs to invest in growth without the traditional hurdles associated with financing," explained Mukul Goyal, founder and director of Stratefix Consulting.
Although only 12 per cent of India's 64 million MSMEs are digitally mature, as per a RedSeer report; the shift to a cashless and paperless ecosystem brings transparency and ease to credit availability. Innovative financing options, such as supply chain financing, invoice discounting and cash flow-based lending, provide MSMEs with vital working capital. With over 500,000 eCommerce businesses in India, as reported by IBEF, digital financing overcomes traditional challenges. This digital revolution empowers MSMEs, facilitating growth and expansion. As the sector continues to evolve, digitally-enabled financing options will play a crucial role in unlocking the full potential of India's vibrant MSME landscape.
Saahil Goel, managing director and CEO of Shiprocket, observes, "Offering a swift and efficient means of accessing much-needed capital, revenue-based financing is increasing the startup growth by up to 30 per cent. We've already disbursed over INR 35 crores, providing MSMEs with quick, collateral-free financing options. With funds disbursed within two days of document submission, we aim to empower e-Commerce businesses to accelerate their growth with easy and liability-free financing solutions, reshaping the financing landscape for emerging MSMEs."
