Bridging the gap: How technology and advisory services are transforming MSME finance

By Dr. Rajat Chopra, Founder and CEO, BankersKlub

Budget 2025 has reshaped the Micro, Small & Medium Enterprises (MSME) landscape by revising the classification criteria and increasing the credit guarantee cover. An increase in investment and turnover limits has led to a widening of the definition of MSMEs and has brought more units into the fold. Moreover, by increasing the cover for MSMEs from INR 5 crore to INR 10 crore, the government has enabled a potential additional credit of INR 1.5 lakh crore over the next five years.

According to the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), there was a 94% increase in credit guarantees issued between FY21-22 and FY22-23. From 11.65 lakh guarantees worth Rs 1.04 lakh crore issued in FY21-22, the number went up to over 17 lakh guarantees worth over INR 2 lakh crore the following year.

Undoubtedly, these measures are improving access to funds, but gaps still exist in MSMEs’ credit-readiness. Research shows that 47% of the demand for MSME credit is “unaddressable”, because either the businesses are not financially viable, or they prefer informal funding channels. The credit gap is even bigger for loans of up to INR 10 lakh, accounting for 70% of unmet demand.

For long, businesses have taken an informal and unorganised approach to fundraising. They fail to take a holistic view of the needs of the organisation. Poor preparedness, including inadequate accounting practices, leaves many MSMEs out of the formal lending sector as they do not meet the stringent eligibility criteria of banks and Non-Banking Financial Companies (NBFCs).

MSMEs Must Mind These Gaps

Accounting practices: Businesses often take a myopic view while preparing their books. They may under-report revenue and net income and show muted profits to reduce their tax liability. On the other hand, they inflate their books while taking loans to project a rosy picture of their financial health. Such practices create a poor impression of the company in the eyes of the lender and leads to reduced internal rating.

Long-term approach: The accounting team and advisors need to consider not just the immediate requirements but also the company’s long-term financial health. To this end, there needs to be open and transparent communication between advisors and business owners on the requirements of financial reporting.

Geographical disadvantage: MSMEs from smaller cities and towns lack access to quality financial advice. The lack of advisors in their place of operation has until now been a significant constraint in their search for funding.

Awareness of funding schemes: The Government of India has announced several measures for MSME credit. But gaps exist in the dissemination of information among the public. Borrowers do not have dedicated in-house resources to track these developments, understand their eligibility or how to apply for a scheme.

Cost of advice: The unorganised nature of advisory services in our country has been detrimental to MSMEs. High costs and the opaque nature of fee structures have kept business owners from seeking advice.

Financial Advisory in the Digital Age

Whether it is a first-time entrepreneur from a small town or an established business with poor accounting and reporting capabilities, getting the right advice is critical to building financial credibility, sustainability, boosting credit ratings, and securing funds.

Today, with digital financial advisory platforms like BankersKlub, an MSME’s search for credit facilities has become smoother. Such platforms are taking banking advisors closer to businesses, including those in remote parts of the country.

Fulfilling immediate fundraising mandates: Each credit need is unique and requires personalised and tailormade approach from qualified individuals. Technology enabled marketplace platforms help to match the requirements of the borrower with the right advisor to draw up a project plan. The most important factor is the health of financial indicators. Advisors will prepare projected financial statements, along with calculations and an analysis of financial ratios. Depending on each scenario, the advisor could ask for a critical analysis and evaluation of the financial details or its recalculation. Then comes the Credit Monitoring Arrangement (CMA) report, a critical document a lending institution needs to assess the proposal.

Improving credit ratings: Formal lenders, such as banks and NBFCs, offer loans at reasonable rates compared to informal lenders. However, due diligence is important to these lenders, which can be daunting for a small business. Advisors come into the picture by simplifying documentation, preparing the required financial statements and analysing statements, thus taking the load off business owners. Over a period, these practices will bring robustness to their internal processes and help improve the business’ credit rating.

Transparency in fee structures: Digital platforms are taking care of another key barrier–transparency in the fee structure of intermediaries. Businesses can today approach an advisor without having to worry about unclear pricing and hidden costs. Such trust-building is critical to bringing more MSMEs into the formal credit lending sector.

Geographical proximity: Fund seekers from small towns who do not have access to suitable advice can connect to advisory platforms to search for someone close to their place of operation. Unlike other businesses that have gone digital-only, fundraising needs a strong human connection for trust building. Platforms offer ‘phygital’ solutions–physical, on-site meetings and virtual consultations–for flexibility and reach.

Credit score monitoring: Periodic monitoring of a business’s credit score can be done online on various platforms. A check on the score can keep business owners updated and help them address discrepancies promptly and effectively. Having an advisor for guidance goes a long way in addressing these concerns.

The role of qualified financial advisors like former bankers in improving credit access and the credit-worthiness of MSMEs cannot be over-emphasised. Until recently, business owners had limited scope to rope in advisors for their funding needs. Today, advisory services have gone location-agnostic, affordable, flexible, offering physical + virtual presence. The phygital mode, coupled with an understanding of a business’s credit needs, is the way to go in securing funds and boosting small and mid-market businesses.