Inc42 & WebEngage present, the second edition of “Decoding Hypergrowth”, a series capturing stories of successful businesses, the importance of intelligent engagement and their approach to creating the same.
The biggest dilemma for micro, small and medium enterprises (MSMEs) is knowing when is the right time to look for credit, what the right amount is and how fast they can raise the money to meet operational requirements. India is home to nearly 6.3 Cr MSMEs, accounting for almost 37.5% of the GDP. But most of them lack a well-structured credit financing strategy that can see them through difficult times.
Ahmedabad-based Harshvardhan Lunia had seen this too often when he grew up. His father was a business owner residing in the city, and the family had to cope with similar challenges. However, he had pursued a career in finance, working with the likes of HDFC Bank, Standard Chartered Bank and the ICICI Bank for a decade or so. His work helped him understand why and how small businesses struggled to raise business loans. It also motivated him to develop a tech-driven credit system different from legacy banks, traditional NBFCs or other financial institutions (FIs).
Keen to pursue his passion without further delay, Lunia (CEO), along with Mukul Sachan (the COO left the company in 2019), set up Lendingkart in 2014 to offer collateral-free, short-term loans to MSMEs. But it was easier said than done, as the startup realised from its extensive conversations with many small business owners.
For starters, MSMEs come with their unique set of challenges as these are more susceptible to market volatility, and even small dips in sales can affect their revenue flow. Second, many lack the credit history or formal financial data needed to assess their creditworthiness. Plus, there is the massive paperwork required by FIs to process loan applications and the long turnaround time for loan disbursements. As most MSMEs are regional entities located away from the Tier 1 business hubs, FIs often find it geographically constraining to approve such loan applications. Businesses, too, struggle to navigate complicated documents in English/Hindi as most of them speak regional languages. The lack of collaterals/guarantees and high-interest rates charged by the grey market operators also throw a spanner in the works.
Together, these factors have a massive credit gap. According to Research and Markets, the credit demand in the MSME space is $490 Bn as per the RBI data, while the overall supply from formal sources stands at $192 Bn, underlining how this sector remains underserved even today.
Lunia concurred. “Even today, the credit process in traditional FIs takes months as credit evaluations are hampered due to the absence of crucial data points. When we started in 2014, MSMEs had very few resources, and the ones that existed should have done some hand-holding for business owners due to the complicated nature of these transactions. But no one did it,” he said.