Can the digital maturity of MSMEs in the post-COVID era be a measure to assess solvency?


No sector is spared from the massive transformation brought about by the global pandemic.

Micro, small and medium-sized enterprises (MSMEs) are no different.

In fact, as the pandemic continued and lockdown restrictions grew tighter, more and more consumers were pushed to take the digital route to conduct their business. This has given a huge boost to the pace of formalization and digitization of MSMEs.

From strengthening digital payments, managing transactions remotely and promoting direct-to-consumer (DTC) models to increasing digital commerce, the immediate benefits of digital interventions are vast.

This rapid digital adoption by customers and MSMEs has opened doors that were unthinkable just a few years ago.

How does digitalization bring financial transparency and inclusiveness?

According to reports, India had around 6.3 million MSMEs in November 2021. All of these businesses are leveraging advanced digital technologies to avail all kinds of opportunities. By transacting and making payments online, companies increase their financial transparency and provide comprehensive cash flow information to potential investors or creditors.

The increased digital footprint of MSMEs, assembled by extensive private and public (consensus) data, allows lenders to better model credit risk.

Unlike a few years ago, the only cash flow visibility a company could show at the end of a fiscal year was in the form of filing an annual report.

However, things are different today.

For the past few years, GST payments, transaction streams, Provident Fund (PF) payments, and other reliable records can be accessed on a monthly basis. This actionable information enables lenders (banks or other financial institutions) to better assess the creditworthiness of MSMEs.

Undoubtedly, the new digital maturity will also help MSMEs get much-needed credit to strengthen their business over time.

What does the future hold?

Globally, one of the largest constraints facing MSMEs is access to cheap credit.

For ages, this sector has struggled with the credit deficit exploited by traditional methods of assessing creditworthiness. Conventional creditors like banks viewed these businesses as high risk due to their lack of financial documentation, uncertain business plans, lack of collateral or track record. As a result, they preferred to extend credit to large companies.

In fact, in 2021, several leading news outlets reported that traditional lending institutions (banks) extended just 1.1% more credit to MSMEs in August compared to the previous year.

However, digitization and real-time big data have now enabled banks and other financial institutions to assess the creditworthiness of MSMEs through unconventional mediums.

In the coming years, mobile usage, cloud-based services, big data analytics, and new era technologies will continue to flourish. They will provide many opportunities for underserved MSMEs who need credit to approach banks and NBFCs.

Many banks and fintech institutions have already started joining forces to assess the creditworthiness of MSMEs in a new light. Digitization also allows banks and other credit institutions to expand their customer base by simply connecting to fintech.

This is a whole new era of growth, where MSMEs can effectively remove financial constraints from the equation.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)

Edited by Teja Lele Desai

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