India’s MSME sector contributes about 29% to GDP and employs about 110 million people across the country. However, the sudden onset of the pandemic turned everything upside down, causing economic turmoil across the country. The pandemic has been particularly brutal for the MSME sector due to the severe shortage of liquidity. As the MSME sector struggled hard to stay afloat, the financial turmoil seemed like too much of a hurdle to overcome.
The government then proposed a series of measures to help sectors in financial difficulty. Measures such as the increased emergency line of credit guarantee for businesses, subordinated debt programs and fund-of-funds programs were a huge relief as the sector watched what appeared to be a crisis without end. The country has also seen a growth in financial startups that have come forward to provide financial support to MSMEs with unsecured loans. Financial institutions that provide unsecured loans have become a savior for MSMEs in times of distress.
Here are some of the ways in which informal credit institutions can help revive the MSME sector.
1. Unsecured loans will help inject liquidity into the sector
Although small businesses are the engines of economic growth, business financing problems prevent them from unleashing their full potential. And with the pandemic coming as a sudden blow, MSME businesses have only found themselves drowning in bigger debts. Getting a loan is especially difficult for small businesses because they have no valuable assets to offer as collateral. This is where finance companies offering unsecured loans can be a major relief. With flexible terms that do not require MSMEs to submit collateral, finance companies can inject liquidity into the sector and save MSMEs from going through the ordeal of acquiring expensive assets in the midst of a crisis.
2. An accelerated disbursement process can invigorate cash-strapped businesses
An urgent need for funds often goes unmet due to slow loan application processes. By the time the loan application is approved, businesses may have lost a crucial opportunity to expand or scale their operations. A fast-track process that prioritizes customer experience can help MSMEs get started with less hassle. Access to fast capital is absolutely essential for the growth of MSMEs and new emerging finance companies can jump-start the sector through rapid disbursement of loans. Minimal paperwork and quick verification of documents will encourage small businesses to apply for loans and start their business quickly.
3. Personalized loans can accelerate economic recovery
Finance companies offering unsecured loans can offer customized plans to meet the needs of small businesses. These personalized loans will be a savior for businesses that need funds for planned or emergency purposes. Tailor-made loans are those that are designed to meet the specific needs of a borrower. Finance companies offering unsecured loans can tailor their loan products after analyzing specific borrower requests so that small businesses can benefit from greater flexibility. This will prove to be a decisive step towards addressing credit gaps in the MSME sector.
4. Digital lending would ensure access to a wider range of services
The RBI has encouraged the digitization of MSMEs to keep the sector competitive and relevant. Subsequently, digital loans from finance companies can provide a major filip to the MSME sector. Online loan application, digital exchange, and document verification would be a game-changer for small and medium-sized businesses, as businesses in all geographies would be able to benefit from fast loans. The MSME sector urgently needs simple and affordable financing solutions and finance companies with digital lending facilities can ensure access to a wide range of financing options to choose from under one roof.
5. A less strict qualification process can be a respite for the MSME segment
Traditional lenders usually need to be convinced of a good credit history before they can approve loans. But small businesses usually don’t have an impressive credit history to show for many reasons. Finance companies with less stringent loan eligibility requirements can rescue deprived MSMEs of opportunities to finance their business. There are many finance companies offering small business loans for working capital needs, asset purchases, or expansion plans despite having an average credit history. Seeking financial assistance from these companies can solve a host of financial problems crippling the MSME sector.
As MSME incomes have been severely impacted by the pandemic, easy financing options are undoubtedly the need of the hour. Finance companies offering unsecured loans can enable a continuous flow of capital for MSMEs, thus strengthening MSMEs under the pressure of adverse cash flows. MSMEs need to explore and take advantage of lending options from informal lenders in order to emerge stronger in the future. With India becoming a hotbed of financial startups offering flexible loan terms, the way forward for MSMEs definitely looks promising.