Credit demand of digitised SMEs to cross $570b in 5 years, says report

In the next five years, the credit requirement for digitised small and medium enterprises (SMEs) is projected to exceed $570 billion. At present, these digital businesses jointly possess a credit demand potential amounting to $220 billion. However, only $165 billion of this demand is being fulfilled, creating a substantial opening for alternative financing to seize upon, according to Redseer Strategy Consultants and GetVantage’s India Digital SME Credit Report 2023.

India is a nation of small businesses and home to over 64 million MSMEs that collectively account for 30 per cent of India’s GDP. As per analysts, around 12 per cent, equivalent to 7.7 million MSMEs, have undergone digitisation.

Despite being acknowledged as the growth engine of the nation, this sector grapples with inhibiting challenges such as limited digitisation and strained access to capital, states the report.

Additionally, SMEs demand is representative of the working capital requirements of this vast group of digitised businesses. However, the addressable demand excludes enterprises that exclusively seek informal finance, are not commercially viable, are sick enterprises, or are on the verge of closure.

• Also read: Bank credit registers robust 16.3% y-o-y growth in June 2023

“Small businesses account for 90 per cent of credit demand but continue to struggle to raise capital, owing to poor business metrics, limited assets, and uncertain growth projections. If the current economic and regulatory climate continues, this gap is likely to widen significantly over the next five years,” said Kanishka Mohan, Partner at Redseer.

These challenges pose a threat to the success of digitised businesses that have an existing credit demand of $220 billion (as of FY22), of which $165 billion is serviceable.

During FY22, approximately $53 billion was injected into the market through various lending channels, accounting for only 30 per cent of the total addressable demand.

In fact, it is estimated that digitisation of small and medium businesses has the potential to add $150–200 billion (0.05 per cent) to India’s GDP by 2024 and contribute to the economic recovery post-Covid-19 pandemic.

Moreover, digitisation brings with it benefits such as a larger audience, lower costs, and increased efficiency. Although only 12 per cent of MSMEs today have embraced digitisation, it is expected that digitised businesses will grow sharply over the next five years.

• Also read: Bank credit registers robust 16.3% y-o-y growth in June 2023

Financial challenges

While raising capital has always been a challenge for SMEs, the formal lending systems comprising public and private banks have only been able to service 30 per cent of the overall demand.

The supply gap has opened up vast opportunities for NBFCs and third-party lenders, such as revenue-based financing platforms, trade financiers, and others, to serve the growing market. As a result, 40 per cent of the overall capital investment into the SME market went to digitised SMEs (12 per cent of total MSMEs).

• Also read: Share of large borrowers in gross advances declines for the third successive year: Report

Alternate financing has a vital role to play in extending the limited reach of traditional lenders to serve millions of new-economy businesses and emerging sectors. The $570 billion credit requirement for digital SMEs represents an opportunity for alternate-financing platforms, NBFCs, and traditional financial lenders (Trad-Fi) such as banks to collaborate and catalyse economic growth by prioritising compliance, governance, inclusion, and innovation,” stated Bhavik Vasa, Founder & CEO of GetVantage.

At present, the share of alternate finance is 5 per cent, which Redseer estimates can double to reach 11 per cent in the next five years.