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Credit Disrupted

Digital MSME Lending in India

There are between 55 and 60 million micro, small, and medium-size enterprises (MSMEs) operating in India today, which are leading contributors to the nation’s employment and gross domestic product (GDP). Yet this contribution remains well below its potential. A significant barrier to growth has been the lack of access to formal credit—today, roughly 40 percent of India’s MSME lending is done through the informal sector, where interest rates are at least twice as high as the formal market.

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This lending landscape is set for rapid change, with digital lending poised to disrupt the status quo. We estimate that by 2023, MSME digital lending has the potential to increase between 10 and 15 fold to reach INR 6-7 Lakh Crore ($80-100 billion) in annual disbursements, creating a meaningful opportunity for innovative startups as well as traditional lenders.

The India MSME opportunity is driven by three major shifts.

First, MSMEs, especially those with annual revenue between INR 10 L and INR 1 Cr ($15,000-$150,000), are rapidly formalizing and digitizing. The government-led 2016 demonetization, Unified Payments Interface (UPI) launch, and 2017 Goods and Services Tax (GST) have each impacted MSME formalization and digitization. In parallel, market competition since 2015 has led to a dramatic shift in connectivity, with a 95 percent drop in data costs, eight-fold increase in MSME data consumption, and 85 percent total MSME smartphone adoption.

Second, the maturing India Stack, along with growing API-based data availability, has fundamentally transformed every step of the credit value chain. Near end-to-end digital MSME lending has become a reality, with loan approval turnaround times as short as one day.

Third, the increased receptivity to digital lending by MSMEs indicates the large scale of the potential market. More than 75 percent of the MSMEs surveyed report they are comfortable sharing data digitally, and over 60 percent expect to have significant digital payments in the next three years.