Digital credit is a monumental step toward the empowerment of Indian MSMEs

Appraising a business' creditworthiness has to be looked at from a completely different point of view now, post-pandemic. Digital lending has reduced the time taken for the loan application process with minimum or even no paperwork involved for the applicant.

Anil Gopinath
Anil Gopinath

Financial institutions have a long way to go before speeding in meeting the credit needs of MSMEs, who contributed over 30% of India’s GDP and ~ 40% of exports. In fact, last year, MSME minister Nitin Gadkari said that MSMEs’ contribution should be raised to 40% in the coming years.

But, at a time when traditional financial institutions continued to under-serve MSMEs, the covid-19 pandemic added a spanner in the works, further stressing the system. Even though the traditional models of assessing credit risk were on the verge of becoming obsolete pre-pandemic, covid pushed it to the edge.

Role of Fintech

Financial technology has disrupted the traditional lending space and has made financial services accessible to those that didn’t possess them before. The increased internet penetration (50% in 2020 as per Statista) and mobile penetration (54% in 2020) in the country can facilitate the rising adoption of fintech services.

Entrepreneurs and traders can now raise funds even if they do not meet the credit scoring requirements of traditional financial institutions. FinTech’s attempting to bridge this credit gap problem have come up with agile and innovative ways in which they can assess MSMEs’ risk rather than just referring to their CIBIL score, turn-over, GST returns, and transactions.

Historical documents usually preferred by banks work as a disadvantage to small businesses that are already underserved. Hence, machine learning comes to the rescue by way of algorithms that consider alternate sources of data and predict cash flows and more effectively analyze factors that contribute to the risk of the transaction. Digital lenders are disrupting the lending space and have identified differentiated credit underwriting models based on data points such as cluster area, industry, and seasonality of cash flows, to name a few. Thus, ensuring that they reach out to a broader selection of borrowers who deserve business credit.

The nation has a growing ecosystem of digital lenders, and the sheer demand in the second largest populated country has made continuous innovation inevitable. Another technology application for availing digital financing is the Trade Receivables Discounting System (TReDS) electronic platform that facilitates invoice trading. Blockchain technology has effectively countered double financing in TReDS, and Application Programming Interfaces (APIs) have made it easy for lenders to verify KYC documents.

Speed is vital when it comes to the dissemination of financial services. While dealing with cross-border trade, a business has to make quick decisions, and seamless working capital is essential for an enterprise to grow.  To meet these requirements, lenders offer financing products such as RF, IF, and SCF, a type of loan that makes provisions for quick funds that help MSMEs counter challenges arising from delayed payments. Here, businesses get an advance payment on invoices up to 80% of the value. 100% of the payment is then collected from buyers, and the rest of the amount is paid to the customer.

Digital Transformation Post Covid-19

Appraising a business’ creditworthiness has to be looked at from a completely different point of view now, post-pandemic. Digital lending has reduced the time taken for the loan application process with minimum or even no paperwork involved for the applicant. Businesses can avail credit as quickly in a matter of minutes at times. The dependency on traditional institutions has been reduced to some extent, with fintech companies coming into play too.

Keeping up with fintech trends, the digitalization of banking and finance has been a boon to fastening financial processes. This can be attributed to the pandemic. Digital banking system deals saw one of the highest shares among other deals where financial institutions ramped up their digital transformation strategies in the wake of the pandemic-induced social distancing norms. Incumbents are partnering with fintech firms and even coming out with their subsidiaries to ensure that better lending can be executed. Gone are those days when incumbents took advantage of their long-standing position in the market.


Technology innovations are paving the way for money to be available to MSMEs on time. This is bound to have a significant impact on cross-border trade in the years to come and will help resolve one of the long-standing woes faced by Indian exporters and importers.

The views express in the article are that of Anil Gopinath, CTO, Drip Capital. does not necessarily endorse it and will not be held liable for any direct or indirect damage made to any individual or organisation.