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How digital payment adoption is rewriting the history of MSME credit in India?

After demonetization, the Covid-19 pandemic has been a major accelerator for the mass adoption of digital payments among consumers and merchants. Digital payments volume increased year on year with 7,422 crore transactions in FY2022, up 33% from FY2021, according to Ministry of Electronics and Computing (MeitY). Comfort with digital payments has increased with UPI being the most popular mode, and this is reflected in recent figures released by the National Payments Corporation of India. As of October 2020, India processed over 2 billion monthly UPI transactions worth INR 3.86 crore. In May 2022, UPI transactions crossed the 6 billion transaction mark worth INR 10 crore.

In a country with 6.3 crore MSMEs, where micro-transactions are an important part of the economy, a series of measures by FinTech players, namely digital acquisitions, low-cost payment devices, new methods payment platforms such as UPI, QR and differentiated technology and operational platforms cater to the needs of the ever-growing MSME sector in India. Digital payment platforms have had a major positive impact on the MSME sector post-pandemic. It has provided consumers with contactless and cashless payment methods, which has helped MSMEs easily maintain their records, and the convenience is also relatively inexpensive to adopt.

Role of digital payments in digital lending to MSMEs

In recent years, many efforts have been made to facilitate the growth of MSMEs in India. Recently, the Federation of Indian Export Organizations (FIEO) launched a B2B digital marketplace for MSMEs to help them expand into global markets. RBI has also released a framework for geo-location of payment system touchpoints to create a robust payment infrastructure and has spearheaded various initiatives to increase the penetration of digital payments among Indian small merchants.

The shift to digital modes by MSMEs creates an auditable digital trail of financial transactions for new era FinTech lenders to assess MSME creditworthiness and extend credit. Digital transaction data acts as a substitute for traditional cash flow statements. Regular online transactions highlight the financial health of the business and show its ability to upgrade and compete in a dynamic business environment. Cash flow based lending models facilitate inclusive and easy access to credit as MSMEs. Merchants who previously avoided receiving formal credit due to a tedious and time-consuming application process or who were unable to qualify for a loan from traditional lenders can now benefit from hassle-free digital transactions and data-driven lending decisions. This is particularly advantageous for light-file customers or new credit customers who do not have a credit history. Obtaining loans through a model based on cash flow and digital payments helps establish the MSME borrower’s credit history, making them eligible for formal credit from financial institutions in the future.

The future of MSME lending based on digital payments

Growth of retail electronic payment systems including national electronic funds transfer (NEFT), mobile banking and development of payment acceptance infrastructure is expected to boost digital payment transactions by 2,153 lakh INR crore in FY20 to INR 7,092 lakh crore in FY25, according to India Trend Book Report 2021 by Indian Private Equity and Venture Capital Association (IVCA) and E&Y. Another report by KPMG states that the digital payments market in India is expected to grow at a compound annual growth rate of 22% during the period of FY 2020-2024 and will be worth INR 4,323.63 trillion. here fiscal year 2024.

Currently, most large NBFCs and even new-era FinTechs rely on financial statements to estimate the creditworthiness of MSMEs. As Indian MSMEs move towards digital literacy, credit offerings are also evolving to meet the diverse business needs of customers. We are already seeing how lending decisions are made based on a risk assessment of other data sources. The digital transaction data assessment base will help bridge the credit gap of MSMEs, which will ultimately create a positive multiplier impact on the lives of Indian small traders. Thus, a new segment of underserved and unserved customers will gain an entry point into the formal credit system and strengthen the financial inclusion story in India.



The opinions expressed above are those of the author.