Time for lenders to rethink MSME credit

Financial institutions must pivot towards cashflow tracking and unified digital networks to unlock funding for small businesses, reports Raghu Mohan

- RAGHU MOHAN

Finance Minister Nirmala Sitharaman has asked lenders to go beyond standard offerings for micro, small and medium enterprises (MSMEs), urging them to think in terms of specific business verticals’ needs and adopt a cashflow-based approach.

MSMEs contribute nearly 35 per cent to India’s manufacturing output, 48 per cent to exports and around 31 per cent to gross domestic product. They comprise over 74.7 million entrepreneurs and provide livelihood to more than 320 million people.

The encouraging aspect is that the building blocks are in place now, and it is up to lenders to use them imaginatively.

Beena Vaheed, executive director of Bank of Baroda (BoB), points to the rapid formalisation of this sector. It has more than 75 million enterprises on the Udyam and Udyam Assist platforms, providing an unprecedented volume of verifiable data to tap into. “We are leveraging digital data, GST information, banking transaction patterns, account conduct, supply-chain linkages and alternative data sources to better understand MSME business models.” BoB has designed credit structures for unique sectoral needs, such as Digi-Udyam for loans up to ₹2 crore. The scheme is backed by the Credit Guarantee Fund Trust for Micro and Small Enterprises and was jointly set up by the Ministry of MSME and the Small Industries Development Bank of India.

Beyond collaterals