The IT giant had recently announced plans to offer a range of credit products to consumers and small businesses in India through partnerships with lenders and financing companies. The primary objective of the plan is to offer accessible and convenient credit options to individuals who lack sufficient access to financial services. Google Pay will collaborate with accredited financial institutions to underwrite the credit, while ensuring responsible lending practices. The company will extend small-ticket loans, starting at Rs 15,000, to merchants in collaboration with NBFC firm DMI Finance.
On the back of its unique move, the IT major claims it will focus on providing people with access to credit. In India, credit availability is still significantly low compared with global averages. The company is also expanding its personal loan portfolio by partnering with Axis Bank, and users can now avail credit lines from banks on UPI through a collaboration with ICICI Bank.
SME finance, a neglected area
Access to financial services for SMEs remains severely constrained in many developing countries, restricting business growth. The International Finance Corporation (IFC) estimates that 65 million firms — or 40% of formal micro, small and medium enterprises (MSMEs) in developing countries — have an unmet financing need of $5.2 trillion every year, which is equivalent to 1.4 times the current level of the global MSME lending.
Approximately half of the formal SMEs lack access to proper financial resources. This financing gap is further aggravated when considering micro and informal businesses. Interestingly, around 95% of the credit demand arises from micro and small enterprises. To meet their financial needs, many MSMEs resort to borrowing from informal sources, such as local moneylenders who charge extraordinarily high-interest rates.
According to IFC, SMEs are responsible for over 80% of job creation in developing countries. However, there is a dire need for SME finance as 40% of MSMEs in 128 countries are credit-constrained.
Using technology for conducting business activities has become a significant obstacle for small and medium enterprises (SMEs) in rural and semi-urban areas, according to Lakshmi Venkataraman Venkatesan, the Founding and Managing Trustee at Bharatiya Yuva Shakti Trust (BYST). “Using digital for business processes has emerged as a key challenge for the MSME sector for the simple reason that most of our entrepreneurs come from rural and semi-urban geographies.”
Asserting the need to bring in automation tools to smoothen the loan sanction and disbursal process, she adds that mentoring is the key to digital and financial literacy to help MSMEs adopt digital payment platforms like PhonePe, Google Pay and Paytm.
Flagging up a potential stumbling block, she says, “The concern among them remains about the safety and security of the financial transactions. A recent IIT study pointed out that the majority of cybercrime cases revolve around UPI and internet banking. We suggest companies like Google put in enough mechanisms to reduce such frauds, for the safety of micro and small entrepreneurs and the public.”
The other area of concern for Google will be the Reserve Bank of India’s recent missive to banks and lenders on unbridled growth of unsecured lending in the country. “Certain components of personal loans are, however, recording very high growth. These are being closely monitored by the Reserve Bank for any signs of incipient stress. Banks and NBFCs would be well advised to strengthen their internal surveillance mechanisms, address the build-up of risks, if any, and institute suitable safeguards in their own interest. The need of the hour is robust risk management and stronger underwriting standards,” said RBI Governor Shaktikanta Das on October 6, 2023. Google will have to ensure it is in sync with the regulatory measures of the central bank towards consumer credit.
Small and medium enterprises form the backbone of our economy. According to the India Digital SME Credit report for 2023, there is a credit shortage of about $220 billion in this segment. Within five years, as the quantity of digital SMEs is expected to double, the need for credit is anticipated to surpass $570 billion. This, combined with the deficit, represents a significant roadblock, hindering the economic potential of a multitude of digitally transformed businesses.
Sanjeev Kumar, Co-Founder, Executive Director & CEO, Spice Money, says, “The challenges faced by SMEs in obtaining credit are multifaceted, ranging from the lack of collateral to limited credit history, which are often prerequisites demanded by traditional financial institutions for loans. As a result, a substantial portion of SMEs remain underserved, preventing them from realising their full potential. Google Pay’s initiative … represents a significant stride in the direction of boosting economic prosperity.”
Spice Money has onboarded some 12 lakh MSMEs, he adds.
Recognising the immense value of fintech solutions, a growing segment of MSMEs is seamlessly integrating digitally enabled operations into their daily business practices. Experts say the transformation has primarily been catalysed by the pandemic, and by the government’s demonetisation initiative in November 2016.
Yogesh Gawande, founder of MSME manufacturing firm Niyo Solutions, says, “I use digital banking and have observed that over the last three years, nearly 90% of my customers have become comfortable using digital payment apps like PhonePe, Google Pay and others.” Google’s latest move will significantly boost the financial inclusion of MSMEs, he adds.
