Small and Medium enterprises (SMEs) are the growth engine of our economy. They employ approximately 40% of the India's work force; contribute to around 45% of the manufacturing output and 40% of total India's export. Hence, supporting financial needs of SMEs is crucial. Despite their contribution to the economy, they face the challenge of inability to gain sufficient access to formal lending. As per the BCG reports, nearly 40% of the lending to MSME sector are happening through informal sources like from friends, family and relatives only.
Some facts regarding SME lending in India:
1. As per financial reports, Outstanding bank credit to SMEs/Nominal GDP in India in the year 2015 was 6.2% only which was 2nd lowest in the world after Russia.
2. Only 4% of the MSMEs have "Access to finance" in India as against around 21% in countries like China, Malayasia and Philippines.
The major pain points in access to formal lending includes long processing time, information asymmetry, complex documentation, inability to offer collateral security and high cost of borrowing. While overall credit growth stood at 19.6% (YOY Sep 17- Sep 18) for micro and SME segments, the MSMEs portfolio of public sector banks is showing a declining trend. The market share of PSBs in MSME lending has declined to 48.1% in (Sep'18) from 58.6% in Sep'16 (55.0% in Sep'17) (Source - MSME pulse, December 2018).
The MSME lending landscape is undergoing a paradigm shift. Digitalization, formalization and new government initiative is changing the lending pattern in the MSME sector.
Digitalization has opened new lending avenues for MSMEs such as Peer to Peer Lending, payment banks, NBFC, etc. These new-age lenders are leveraging technology to originated SME loans in huge volumes.
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