Key Points

Fintechs, banks and other lending institutions are actively promoting digital awareness and building infrastructure to bring digital lending to all consumers.

Though traditional forms of lending are prevalent for MSMEs, digital lending has gained significant traction in recent years. From 1 cent loans through digital means in 2017 to a staggering projected 17 per cent in the financial year 2026.

"Although digital lending is at a nascent stage, it is expected to grow faster with the government and financial institutions taking measures to increase its reach," SIDBI said in the report.

The report titled 'Understanding Indian MSME Sector: Progress and Challenges' observes that about 18 per cent of MSMEs are using digital lending platforms and 90 per cent are accepting digital payments.

The survey says that maximum digital credit offtakes are happening in sectors like defence equipment, information technology and Information Technology enabled Services, general-purpose machinery, Auto components, Plastics & plastic products and Transport & logistics are the high-potential sectors for the digital credit offtake.

Sectors such as Hotels, Readymade garments, Food processing, Hospitals, Drugs & pharmaceuticals, Cotton textile, Electronics goods retailers, Fabricated industrial metal products, and Grocery retailers are categorised as the moderate potential sectors.

On the other hand, the least prime sectors for digital credit offtake were electrical equipment, paper & paper products, basic metals (iron and steel), Tiles & sanitaryware.

The SIDBI report added that several other ways, such as the Trade Receivables Discounting System (TReDS), Capital Markets are emerging as alternative lending models for MSMEs.

Globally, alternative sources of finance provide more inclusivity to borrowers and a similar trend is expected in India as well, as people move from collateral-based funding to cash flow-based funding and rely more on Digital Public Infrastructure (DPI) to assess and approve funds.

The report broadly estimates that the sector still has an addressable credit gap of about 24 per cent or Rs 30 lakh crore. The gap is higher in the services sector at 27 per cent; it is estimated to be higher at 35 per cent for women-owned MSMEs, indicating a need for targeted policy actions.

The report highlights that 76 per cent of the women-led MSMEs have access to credit, but they continue to face higher challenges vis-a-vis their male counterparts, with 41 per cent highlighting credit access and high competition as the largest obstacle to their growth.

The SIDBI report adds that around 70 per cent of the survey respondents continue to use traditional modes of marketing, which hinders their scalability and ability to remain competitive.

- ANI