Digi-leap: MSMEs Digitalisation Journey

The Insight Series

DIGI-LEAP: MSMES DIGITALISATION JOURNEY

MSMEs have embraced technology but digital access to credit is afar

Aniket Dani Director aniket.dani@crisil.com

Prateek Jain Manager Prateek.jain1@crisil.com

Kiran Naresh Consultant kiran.naresh@crisil.com

Shilpa Kumar Partner shilpa@omidyarnetwork.in

Amol Warange Director amol@omidyarnetwork.in

EXECUTIVE SUMMARY

India, the world’s fifth-largest economy, has supercharged its way towards rapid economic growth. The government of India has reduced the bureaucratic red tape, and facilitated ease of doing business. The Indian Economy has also made strides towards adopting a digital-first approach, making it an unstoppable economic force.

The 63 million micro, small, and medium enterprises (MSMEs)1, which contribute 33% to the country’s GDP, are the backbone of the economy. Digitalisation has made MSMEs agile, has improved speed to market, and given them access to a global market of customers.

The COVID-19 pandemic became the necessary push towards digitalisation for the nation. However, there were already efforts made to pave the road to going digital. For instance, between the years 2001 and 2020, Rs. 5,644 crore in subsidies were issued2 under the Credit Linked Capital Subsidy Scheme for technology upgradation.

The Digitalisation Journey of MSMEs in India

2016 2017

Launch of Government e-Marketplace (GeM) for online procurement.

Digital MSME scheme to encourage businesses to embrace cloud computing.

2020

Rs 4.5 lakh crore issued under the Credit Guarantee Scheme for Micro and Small enterprises. Champions portal launch for grievance redressal and handholding of MSMEs.

MSME Global Mart launched to facilitate online marketing support.

Udyam Assist Platform launched to bring informal microenterprises under priority sector lending.

2022

Open Network for Digital Commerce (ONDC) launched in beta mode in September.

1 MSME segmentation based on turnover: micro enterprises—Turnover up to Rs 1 crore, small enterprises—turnover between Rs 1 crore and Rs 5 crore, medium enterprises — turnover between Rs 5 crore and Rs 10 crore.

2 PIB: https://pib.gov.in/PressReleasePage.aspx?PRID=1942086

These initiatives have broken ground. However, to understand their impact and to identify the areas of apprehension, it was important to ascertain and quantify the state of digitalisation among MSMEs.

To further these efforts, CRISIL MI&A Research, in partnership with Omidyar Network India (ONI) conducted a cross-sectional survey between February and April 2022 of 604 MSMEs3

Digitalisation gets a launchpad

Small business owners have realised the significance of going paperless. The survey found that MSMEs have not only adopted digital receipts and payments but are increasingly becoimg a part of the digital ecosystem. Cash, however, is still prevalent and

a widespread technological change to achieve operational efficiencies is still to come. Even though MSME owners have become digitally savvy, adoption of digital financial services is yet to happen.

3 A total of 407 MSMEs from Tier 1 cities including Ahmedabad, Bengaluru, Chennai, Delhi NCR, Hyderabad, Kolkata, Mumbai Metropolitan Area and Pune; and 197 MSMEs from Tier 2 cities including Coimbatore, Indore, Jaipur, Kanpur, Ludhiana, Raipur, Surat and Vadodara were surveyed.

Bridging the gap

Based on the survey findings, CRISIL MI&A Research recommends a four-pronged approach to improve MSMEs’ digitalisation levels.

These include

1 2

Incentivise MSMEs to register on Udyam: The government-led platform, Udyam, can become a one-stop shop for catering to the needs of MSMEs.

Address trust deficit and data security issues: Financiers can use a mix of physical and digital models to get MSMEs accustomed to online finance.

Reduce the costs of going digital: MSMEs can streamline their day-to-day operations by partnering with online platforms for procurement, selling, and logistics. These entities should also be encouraged to register on the Open Network for Digital Commerce (ONDC) Open Network for Digital Commerce (ONDC).

3

Enhance financial awareness: Awareness among MSMEs can be improved through partners such as the Small Industries Development Bank of India (SIDBI) and transparent communication about credit scores.

Conclusion

The MSMEs of India have taken the initial steps towards digitising their products, services, and processes. The survey report indicates that while MSMEs have begun their journey to go paperless, digital opportunities are plentiful. An increased awareness about the business benefits of going

digital will encourage these businesses to make further progress. The MSME industry, technologists, and policymakers will benefit from working together and building a collaborative ecosystem to enable a complete digital transformation. The digital shift is here to stay.

KEY HIGHLIGHTS

The digital transformation of MSMEs across the country has kicked off. Be it digital payments, digital receipts, digital savviness of owners, or financial awareness, the digitalisation mission of MSMEs is

Business digitalisation

in full swing. The study indicates that while MSMEs have taken the initial steps towards digitalisation, there is a need to build institutional capacity and increase awareness about going digital.

MSMEs a part of the larger ecosystem

Digital savviness of the business owner

Financial awareness

loans through digital channels

7% of the respondents who were aware of availing credit from fintech and digital channels had utilised this medium to avail credit

MSMEs and their share of digital receipts pre and post-pandemic

Source: CRISIL MI&A Research

Share of digital payments made by MSMEs

Source: CRISIL MI&A Research

There is a reasonably high level of awareness among MSMEs on the existence of a credit bureau score and of availing credit digitally. However, this awareness did not translate into obtaining loans digitally.

The relative lack of comfort with the digital medium for applying for loans can be attributed to minimal understanding of the processes, discomfort with sharing personal data and limited knowledge of the products available. Support from financial institutions and creating awareness about digital channels for availing loans would be factors that can boost their receptiveness.

SURVEY METHODOLOGY

A digital revolution is underway across businesses in India and MSMEs are no different. However, the scale of adoption varies based on the size of the company and the digital savviness of the owners.

CRISIL MI&A Research conducted a cross-sectional survey of 604 such enterprises in Tier and Tier 2 cities to ascertain the extent of digitalisation among MSMEs.

MSMEs by category

The primary objective was to assess how far these MSMEs have come on the path to formalisation and to capture their progress in digitalisation. In addition, the surveyors wanted to capture how digitalisation has aided business growth and efficiency.

The MSMEs were segmented based on the following parameters:

Tier 1 cities: 407 MSMEs

Tier 2 cities: 197 MSMEs

MSME classification by respondent age

In terms of industry, manufacturing-related MSMEs constituted 42% of the survey respondents, traders constituted 32%, and services MSMEs took a 26% share.

Partnership with digital platforms for procurement, selling, and logistics — being a part of the larger ecosystem

Digital savviness of business owner

Extent of financial awareness

CRISIL MI&A studied the digitalisation pattern through a quantitative survey constituting a detailed list of questions. These questions form the four major themes key to understanding the level of digitalisation amongst India’s MSMEs.

Association with digital platforms for procurement and sales

Adoption of online logistics aggregator platforms**

Comfort with digital ecosystem — online payment of utility bills, use of digital banking

Awareness and availing of digital loans

Awareness of credit bureau score and its benefits

Note: *Digital records pertain to maintaining billing and inventory records on software; **MSMEs partnering with logistics aggregators to cater to the e-commerce market segment

The survey aimed to ascertain the factors that affect the digital adoption of MSMEs and the challenges in embracing digitalisation.

MSME ADOPTION STATUS

The CRISIL-ONI survey helped ascertain the digitalisation status among MSMEs and the areas of improvement in embracing digital processes. The survey analysis showed that while MSMEs have rapidly adopted digital payment modes, cash is still widely prevalent.

The study found that while MSMEs have begun the process of digitalisation, the pace of technology adoption is not uniform. For instance, there is a lack of seamless integration of these solutions into the MSME digital value chain.

The adoption of digital models significantly gained prominence after the outbreak of COVID-19, and internet banking and online shopping became ubiquitous. However, about 17% of the survey respondents did not use internet banking. In addition, 41% of the respondents maintained billing and inventory records manually. These respondents cited the lack of technical knowledge and data privacy concerns as reasons for preferring physical transactions.

The study showed that MSMEs are aware of the options to avail credit digitally. However, the awareness of such credit avenues did not translate into obtaining loans. Factors such as a minimal understanding of the processes, discomfort with sharing personal data, and limited knowledge of the products act as inhibitors to going digital. That is the reason over three-quarters of the MSME respondents chose to get loans from offline channels.

Small and medium-sized enterprises (MSMEs) have encountered difficulties in obtaining credit, primarily because the segment is perceived as high-risk and has been underserved by traditional financial institutions. The India MSME Lending Landscape Report 20224 found that formal lenders (banks, NBFCs) meet 15% of the credit requirements of MSMEs. There are bottlenecks in the market, where:

Lenders perceive MSMEs to be high-risk. Cost of physical service delivery is high.

The situation is so exacerbated that the credit gap among MSMEs has reached an astounding ~Rs 44 lakh crore5. A survey conducted by Omidyar Network India6 underscores this shortcoming in MSME credit wherein ~40% of India’s MSME lending is in the informal sector, and an additional 25% is through borrowing by the proprietor or the unorganised segment.

The massive credit gap will be filled only when formal lenders can garner greater comfort through digital data trails on the business of MSMEs, as well as acquire, underwrite and collect MSME loans in a cost-efficient manner.

Here is a holistic overview of the MSME adoption status:

4 https://www.deccanherald.com/business/only-15-of-indian-msmes-credit-demand-met-by-formal-lending-report-1171675.html

5 https://www.financialexpress.com/business/sme-msme-fin-530-billion-massive-credit-gap-in-indias-msme-sector-out-of-819-billionaddressable-demand-report-3031372/

6 Credit Disrupted, Omidyar Network India, September 2020

Business Digitalisation

The first step towards digitalisation is registering on Udyam, a unified government portal for MSMEs. Udyam registration helps MSMEs avail collateral-free loans from financiers, subsidies on interest rates on

Variation in adoption among MSMEs

loans from financial institutions, and concessions on utility bills. However, it was seen that only 39% of the respondents had registered on Udyam.

Extent of digitalisation and formalisation based on the size of MSMEs

Acceptance of digital receipts was high across MSMEs with marginally higher acceptance among medium enterprises (98%).

Maintenance of billing and inventory management records manually was the highest among micro enterprises (56%).

Udyam registrations were higher among medium enterprises (51%) than micro enterprises (30%)

Extent of digitalisation and formalisation based on industry

More MSMEs in services made digital payments to suppliers (64%) than those in manufacturing (48%).

The number of manufacturing businesses with Udyam registrations (50%) was higher than that of those in trade (31%).

MSMEs’ Digital Ecosystem

MSMEs have made notable progress towards integrating with larger digital ecosystems. The CRISIL-ONI study showed that around 47% of manufacturers and 41% of service-based MSMEs leveraged digital platforms and e-commerce to sell their products. However, 30% of traders using selling platforms and e-commerce aggregators get less than 10% of their sales through such platforms.

A city-wise analysis indicated that MSMEs in tier 1 cities are generally more adaptive to these platforms, with 37% of MSMEs generating up to 35% of their sales digitally. In contrast, the corresponding numbers for MSMEs in tier 2 cities were 28% for sales. Among MSMEs, medium enterprises were the most inclined to collaborate with digital procurement and selling platforms.

Variation in adoption among MSMEs

Extent of digitalisation and formalisation based on the size of MSMEs

Collaboration with selling platforms is fairly high among medium enterprises (67%) due to their financial capacity and scale of operations.

Collaboration with procurement and online logistics platforms was low (8%).

Extent of digitalisation and formalisation based on industry

MSMEs in manufacturing collaborated with selling and procurement platforms more (47%). The service-based MSMEs had higher collaborations with online logistics platforms (32%).

Digital Savviness of Business Owners

When business owners adopt technology for personal use, over a period, this might motivate them to consider such solutions for business use as well. The CRISIL-ONI study showed that 83% of the survey respondents used internet banking facilities. Of this, business owners younger than 30 years showed maximum adoption, with 91% of them using internet banking.

Variation in adoption among MSMEs

Online shopping is widely prevalent among business owners as well. Over 75% of the respondents in the survey used online shopping to make personal purchases. However, cash on delivery was the most popular—43% of MSME owners who shopped online only used cash to settle payments.

Extent of digitalisation and formalisation based on the size of MSMEs

High usage of internet banking across the segment but medium (91%) and micro enterprise (77%) users utilise e-banking the most.

Extent of digitalisation and formalisation based on industry

Online shopping saw high participation from MSME owners in manufacturing (85%), compared with those in trading (78%) and services (77%).

Extent of digitalisation and formalisation based on geographical presence

Usage of internet banking was higher among MSME owners in Tier 1 cities (85%) when compared with those in Tier 2 (77%).

Financial Awareness

Fintech and digital loans are no longer alien terms to MSMEs. The CRISIL-ONI survey showed that 42% of respondents were aware of digital channels to avail of credit across segments. However, less than 10%

of the respondents availed loans digitally. Lack of awareness, limited knowledge, and lack of comfort in filling out applications were among the main reasons for the low preference for digital channels.

Variation in adoption among MSMEs

Extent of digitalisation and formalisation based on the size of MSMEs

Fairly high awareness of digital channels to avail of loans, with high participation from medium enterprises (55%) compared with micro enterprises (36%).

Extent of digitalisation and formalisation based on industry

Among those having availed of loans through digital channels, traders (29%) held the highest share.

Overall, the MSME respondents cited data security, trust issues, and a lack of awareness as reasons for not availing of digital credit. Support from financial

institutions to improve customer experience on lending platforms and educational tools about digital banking could help change MSMEs’ mindsets.

WAY FORWARD

India’s MSMEs have commenced their digitalisation journey to improve business outcomes and customer experience and remain sustainable in the long term. However, there are a few bottlenecks faced by these enterprises.

The CRISIL-ONI study found that a combination of incentives, cost optimisation, and awareness initiatives can help MSMEs shed their inhibitions.

An overview on how to improve adaptability:

Increase formalisation by incentivising MSMEs to register on Udyam

Udyam can be used as a central point for access to a wider spectrum of options for MSMEs.

Registering with Udyam would enable businesses to avail of subsidies on interest rates on loans, collateral-free loans from financiers, and receive concessions on utility bills, among other benefits. Incentivising MSMEs to register on the portal by highlighting the benefits of holding the registration would subsequently increase their level of formalisation.

Reduce the cost of going digital

MSMEs can streamline their day-to-day operations by partnering with online platforms for procurement, selling, and logistics.

MSMEs should be educated and incentivised to register on the Open Network for Digital Commerce (ONDC)7

Bringing the GST registration threshold for online sellers on par with their physical counterparts would make more MSMEs amenable to selling through e-commerce platforms. At present, physical sellers need a GST registration only if their annual turnover exceeds Rs 40 lakh; in comparison, all online sellers need to register for GST.

Incentives to micro-enterprises to adopt digital payments, and the benefits of doing so, should be adequately publicised. For example, in June 2019, the National Payments Corporation of India (NPCI) created a new category of UPI transactions to enable small offline merchants to accept such payments without having to pay a merchant discount rate (MDR).

7 ONDC’s platform enables the display of products and services from all participating e-commerce platforms in search results across all apps on the network, provided the platform is integrated with ONDC. It is intended to increase competition, foster innovation and enable the benefits of e-commerce to percolate lower down the spectrum to small merchants and into the hinterland.

Increase financial awareness among MSMEs to drive credit penetration

SIDBI could be entrusted with the responsibility of capacity building and ensuring that MSMEs are given access, assistance and advisory support.

Mandating disclosure of borrower’s credit score by regulators for availing loans can help improve awareness and credit penetration.

Address the trust deficit

Financial institutions should proactively address the security concerns of users regularly. The industry could collectively set standards to ensure transparency in operations and ensure that customer data is safeguarded, and data security and privacy are accorded the highest priority.

Entities that cater to business owners having limited digital literacy could implement a hybrid technique of ‘phygital’, a blend of physical and digital, to distribute loans.

A concerted effort by all industry stakeholders will offer a comfortable and secure environment for MSMEs to adopt digital processes and services.

CONCLUSION

India’s 63-million-strong MSME sector has played a vital role in fostering entrepreneurship across India. With MSME products contributing a 45.56% share8 in the total exports of India, the sector is an indispensable part of the country’s economy. Here, digitalisation is an essential element, one that will play the role of an accelerator in developing a selfsufficient economy.

The study by CRISIL MI&A Research and ONI reflects that while MSMEs are taking digital leaps regularly, these entities also display apprehension about technological processes. Inadequate knowledge and technological skills coupled

with a trust deficit pertaining to technology are the key factors dissuading MSMEs from becoming fully digital.

Insights derived from the survey report show that incentivising MSMEs to go digital, reducing digitalisation costs, and increasing financial awareness can go a long way in improving the pace of digitalisation. At a time when the world is increasingly getting digitised, going digital is necessary for MSMEs to build agile businesses. Collaboration and cooperation among all stakeholders can expedite MSMEs’ digitalisation journey.

8 As of September 2023, Ministry of Statistics and Programme Implementation https://pib.gov.in/PressReleasePage.aspx?PRID=1985020

ANNEXURE

Overall distribution of share of digital receipts

Source: CRISIL MI&A Research

Share of digital revenue

Source: CRISIL MI&A Research

Payment made to suppliers using cash

Source: CRISIL MI&A Research

Break-up of respondents using billing and inventory management software

Source: CRISIL MI&A Research

Details of GST returns filing

Details of business document registrations

Source: CRISIL MI&A Research

Source: CRISIL MI&A Research

Factors that will encourage MSMEs to avail of digital loans

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