MSME lending is lending to micro, small and medium enterprises (MSMEs): the small factories, workshops, traders and service firms that make up most of India's businesses. Most of this lending covers working capital. Working capital is the cash a business needs to buy stock and pay its costs before its own customers pay it.
Take, for example, a garment maker in Tiruppur with forty workers. A large retailer orders ten thousand T-shirts. The garment maker must buy cloth and pay its workers now. But the retailer will pay only ninety days after the T-shirts are delivered. For those ninety days, the garment maker needs cash.
A bank would usually ask for three things that such a business does not have. The first is audited accounts, meaning accounts checked by an outside auditor. The second is property to pledge as security for the loan. The third is customers who pay quickly. So lenders now look at what the business actually does instead.
First, the machines. The garment maker needs two new sewing machines. A finance company buys them and leases them to it for a monthly fee. The finance company runs this on lease management software.
Second, the loan. A lender offers an MSME loan decided from the business's GST returns and bank statements, not from audited accounts. With the owner's consent, the lender fetches the bank statements through the account aggregator system. GST returns show the lender how much the business really sells. The garment maker also runs a small factory outlet that takes card payments. For that outlet, revenue-based financing is another choice: the outlet repays a share of each day's card sales.
Third, the export order. A buyer in Germany orders a smaller batch. A trade finance platform arranges a letter of credit, which is a bank's promise to pay the garment maker once the goods are shipped.
Fourth, the invoice. After delivery, the garment maker sends the retailer an invoice due in ninety days. Through invoice discounting, an investor pays it most of the amount now and collects the full amount from the retailer later.
Fifth, the loans are sold on. Many small lenders are NBFCs, finance companies that lend but, with a few exceptions, do not take deposits from the public. The page on NBFCs and banks explains the difference. These lenders share or sell their loans to banks and investors through co-lending and securitisation, and then lend again. All of this rests on India's digital public infrastructure, the shared national systems that make the business's data visible to a lender, with its consent.