The Micro, Small & Medium Enterprise (MSME) sector in India now turns to Peer-to-Peer lending to get access to credit they need to keep the business running.
According to Entrepreneur India, banks, for the most part, require too many documentation that adds to the expenses of MSMEs. Moreover, some start-ups lack credit histories and other financial records, which are integral for bank loans.
Given that MSMEs in India are fast-growing and now 60 million in number, P2P lenders see this as an opportunity to bridge the gap and support small businesses. The sector contributes over 30 per cent in the country’s GDP, plus it employs more than 100 million people.
Meanwhile, from the perspective of banks, servicing MSMEs is costlier, with the need to keep their NPAs in check. In fact, the cost is even higher compared to corporate loans. Given this situation, more banks tend to avoid small businesses to save money.
The rise of P2P lending
CEO and Founder of Faircent.com Rajat Gandhi disclosed that their company lent money to several MSMEs in 2018, amounting to almost 64 per cent of its total loan.
“By going beyond traditional means of credit evaluation and using tech-driven underwriting algorithm, the industry has brought thousands of SMEs under the purview of organized credit,” said Gandhi.
LenDenClub also shares the same sentiments, with co-founder Bhavin Patel claiming that there is a huge opportunity in funding MSMEs as well as their employees.
“Higher aspiration of individuals and SMEs will bring a huge future growth in P2P lending. According to ICRA, the share of lending by Non-Banking Financial Companies (NBFCs) to MSMEs is projected to rise to 23 per cent by March 2022 from the current level of 15 per cent. If P2P loans will come to support, SME lending may touch 30 per cent,” claimed Patel.
At the moment, MSMEs lack awareness of P2P funding. If the Indian government would have to relax the bank’s policies and regulate peer-to-peer lending, small businesses can have better financing options.