Micro, Small and Medium Enterprises (MSMEs) have always played a vital role in the Indian economy. Not only do the 6.3 crore MSMEs in India contribute one-third to the GDP of the country, but they also provide employment to a large segment of the population, particularly the non-formal sector.
Also, in a country like India, which is more a services hub than a manufacturing one, MSMEs have always ensured some competitive intensity between domestic products and imported ones. With the current emphasis on Atmanirbhar, these MSMEs have become even more significant to our economic and financial strategy. The fact that MSMEs contribute 55 per cent and 60 per cent to the GDP of Germany and China respectively is a clear indication that we still have a long way to go in our MSME journey.
The main reason for this gap is the lack of formalisation amongst MSMEs. Even today, out of the 6.3 crore MSMEs only about 1.1 crore are registered with Goods and Services Tax regime. The number of income tax filers are even less. As a result, Indian MSMEs’ credit requirement has been largely unmet due to limited availability and access to data and legacy underwriting methods.
There are two critical forces that will together give rise to niches, new models and propel the credit growth in the MSME sector:
Registration, documentation and certification of entities have been increasing rapidly. From just 22 lakh registered MSMEs in 2015, we are now at 88 lakh, a trend which is accelerating with enabling government procedures and the focus on Ease of Doing Business.
The increasing formalisation as well the as the rapid uptake of the India Payments stack has ensured that we have access to a variety of non-conventional, alternate sources of data for underwriting. New underwriting models, based on such alternate data points are being tested and improved upon every day, providing the opportunity to bring an even larger fold of MSMEs into the formal credit bracket.