According to a study, this 15-fold growth will be possible because of informal sources of funding. Omdiyar’s Partner and Managing Director for India, Roopa Kudva, who said that “As of 2018, most of the credit demand for $600 billion is being met through informal sources. India stands on the cusp of a watershed moment and can serve as a case study for other nations to elevate the role of MSMEs in the economy”.
There are also concerns in the sector about the ongoing impact of demonetisation and GST, and the RBI board has advised the Central Bank of India to streamline loans of up to ₹25 cr.
The study also said that there are currently around 60 million MSMEs that have turnovers of less than ₹250 crore but they are big contributors to the country’s GDP and generate employment as well.
However, in comparison, the contribution of Indian MSMEs is far below than that of their counterparts in the US or China as they lack access to formal sources of finance and pay interest rates which are 2.5 times the ones charged by the formal sector.
The study also argues that this setup will undergo a rapid change, stating that about 40 per cent of the MSMEs will be open to digital lenders. This case will be possible on government policies like the introduction of the unified payment interface (UPI) and goods and services tax (GST), massive reduction in costs of data connectivity and also the “India stack”.
In the study, BCG’s senior partner, Saurabh Tripathi, said “Easier and cheaper credit through digital lending has the potential to trigger a virtuous cycle for formalization and up to 85 per cent of MSMEs could be formal by 2023”. He also added that, at present 60 per cent of MSMEs depend on informal sources of finance, an increasing number of MSMEs are willing to share their data online, and 60 per cent believe they will get larger amount of payments through the digital means in the next three years.