Phygital Lending: Bridging India's Credit Gap for Nano Entrepreneurs

By Neeraj Bansal, Co-founder & CEO, CredRight
 
India is home to 63 million Micro, Small, and Medium Enterprises (MSMEs), forming the backbone of the economy by contributing about 30% to the GDP and employing nearly one-third of the workforce. Within this sector, 11 million nano entrepreneurs, who run small retail shops or manufacturing units with annual turnovers between ₹1-10 million, play a crucial role but often struggle to access formal credit. Of the ₹36.7 trillion credit demand for MSMEs, only about 30% is met through formal channels. The situation is even more severe for nano enterprises, with a credit demand of ₹2 trillion, much of which is met through informal sources like money lenders, family, and friends. 
 
Overcoming Credit Access Challenges 
 
Despite the vast formal financial ecosystem in India, only 10-15% of nano entrepreneurs' credit needs are met by formal sources. These entrepreneurs often require unsecured loans, as they may not have collateral. However, few banks and Non-Banking Financial Companies (NBFCs) offer these products, and those that do rarely tailor them to the unique cash flow cycles of nano businesses. A customized approach is essential to bridge this gap, ensuring quick, convenient, and appropriately sized loans for nano entrepreneurs. 
 
Addressing Credit History Issues 
 
Unsecured lending has surged, with the Reserve Bank of India (RBI) reporting a 19.2% increase in MSME credit to ₹24.6 lakh crore in March 2024. NBFCs have been particularly active, leveraging demographic shifts, fintech advancements, internet access, and digital payment systems. However, just as MSME loans are being given a boost by these factors, so are personal loans. In order to contain the unfettered growth in unsecured lending mainly in personal and consumer loans, RBI had increased the risk-weighted capital requirement by 25 bps, which led to dampening of sentiments in unsecured lending and thereby impacting unsecured business loans segment as well. Distinguishing between personal and business unsecured loans is crucial, as the latter are underwritten based on business cash flows, supporting growth and expansion. 
 
NBFCs have begun using alternative data to evaluate nano entrepreneurs with limited credit histories. For example, chit funds, where entrepreneurs pool money and take turns accessing lump sums, provide structured access to working capital. Integrating chit fund data into algorithm-based lending allows for robust credit profiles, using transaction histories, business records, and local market intelligence. This data-driven approach is scalable, cost-effective, and inclusive. 
 
The Phygital Lending Model 
 
Technology plays a key role in lending but must be balanced with physical support to address the diverse needs of the Indian market. A phygital approach, combining digital and physical elements, raises awareness among nano entrepreneurs about formal financial products tailored to their needs. 
This approach offers multiple benefits. Digital platforms provide immediate loan approval insights, while face-to-face support builds trust and addresses uncertainties. Physical touchpoints ensure timely repayments, making it economically viable for lenders to offer small loans. This model is particularly advantageous for historically unbanked and underbanked nano entrepreneurs. 
 
Empowering MSMEs for Growth 
 
By facilitating formal credit access through NBFCs, MSMEs can build robust credit histories and access customizable, affordable loans, driving business growth and employment. Distinguishing between personal and business unsecured loans is vital for proper risk categorization. Strengthening underwriting criteria and enabling guarantees can mitigate systemic risks and ensure continued credit flow. 
 
India's growth in the next decade will be fueled by nano entrepreneurs. With over 11 million such enterprises, their integration into the formal financial ecosystem through innovative lending solutions is crucial for financial inclusion and sustainable growth.