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Financing the Forgotten: Redefining MSME Lending for Scale, Impact, and Profit
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The Bottom of the Pyramid Isn’t a Risk — It’s a Missed Opportunity
C.K. Prahalad’s groundbreaking idea in The Fortune at the Bottom of the Pyramid argued that the world’s poorest segments represent a vast untapped market. In India, the clearest example of this is the 63 million+ micro, small, and medium enterprises (MSMEs) that form the economic backbone of the nation—but remain largely excluded from formal finance.
These enterprises aren’t unbankable, they’re underserved. Only 14% of Indian MSMEs have access to formal credit. The rest rely on informal lenders, personal savings, or daily borrowing at exploitative rates. This creates a credit gap of over ₹20–28 lakh crore.
The solution? Rethink how lending is done. Serve this segment not with diluted versions of corporate products, but with models built from the ground up—for affordability, flexibility, and local context.
Rethinking the MSME Borrower
MSMEs span everything from a tailor’s shop in Kanpur to a food processor in Coimbatore. What unites them isn’t industry or location—it’s a chronic lack of access to working capital. Traditional banks fail to serve them due to high collateral requirements, thin-file credit histories, and branch-led distribution models.
But this doesn’t mean MSMEs are risky borrowers. Microfinance models have proven for decades that even borrowers with no formal credit history can be reliable when given the right support.
Behavioral insights, such as a shop’s daily sales or a borrower’s digital transaction patterns, can be stronger predictors of intent and ability to repay than legacy credit scores.
Prahalad’s Playbook for Inclusive Lending
Prahalad’s principles for profitably serving underserved markets are highly relevant for MSME lenders today:
1. Create Buying Power by Enabling Credit:
Affordable working capital loans can help MSMEs purchase inventory, machinery, or hire staff. When designed well, small-ticket loans can unlock major productivity gains for businesses operating on razor-thin margins.
2. Tailor Products to Local Needs:
A generic loan won’t work for a rural artisan or a first-time borrower in aTier-3 city. Lenders need to understand repayment behavior, seasonal income cycles, and even local community dynamics to create loans that work in the real world.
3. Improve Access Through Innovation and Partnerships:
Digital infrastructure—like UPI, Aadhaar, and e-KYC—makes it possible to onboard and serve borrowers at scale, with near-zero physical footprint. Meanwhile, co-lending partnerships allow fintech s and NBFCs to combine underwriting and last-mile distribution with banks’ access to low-cost capital.
4. Focus on Affordability and Value:
If MSME credit is priced too high, it simply replicates the problem of informal borrowing. Affordable, well-structured loans—repayable in small, frequent installments—offer MSMEs a sustainable path to growth. When credit becomes a tool for empowerment, not entrapment, both borrower and lender win.
Technology: The Great Enabler
Over the last decade, fintech lenders in India have transformed MSME credit. Companies like Lending kart, Aye Finance, Kinara Capital, and Neo Growth have built digital-first platforms that reduce operational costs and enable small-ticket lending at scale. Algorithms now analyze data from GST filings, POS machines, bank accounts, utility bills, and even SMS receipts to assess creditworthiness.
For example, Neo Growth lends against card swipe transactions, while Aye Finance evaluates the production capacity of a micro-manufacturer’s tools to determine loan size. These innovations help lenders serve MSMEs who would otherwise be instantly rejected by traditional systems.
Embedded finance is also rising—supply chains, marketplaces, and large tech platforms are integrating credit into their ecosystems. This reduces acquisition cost, provides valuable context, and ensures repayment is tied directly to the borrower’s income streams.
Behavioral Insight > Bureaucracy
Technology alone won’t win trust. Human understanding is essential. MSME owners are resourceful but cautious. Many are first-time borrowers who may not understand EMIs or digital contracts. Lenders who combine digital tools with empathy—using vernacular communication, local field officers, or gamified credit milestones—see higher engagement and re-payment rates.
Some FinTech's even tailor repayment structures to fit daily cash flows or celebrate repayment milestones with digital nudges. This builds trust and strengthens relationships, leading to repeat business and community referrals.
Flexible, Affordable Credit Products
Affordability is more than interest rates—it’s about structure. Flexibility in tenure, repayment frequency, and ticket size allows MSMEs to borrow without stress.
Successful approaches include:
- Segmented offerings: Matching loan types to business needs—like invoice financing for manufacturers or working capital for kirana stores.
- Flexible repayments: Daily or weekly deductions that align with sales cycles.
- Graduated pricing: Rewarding good repayment behavior with better terms in future loans.
- Credit-plus services: Bundling credit with business tools or mentorship, so the borrower grows—and so does their repayment capacity.
These models improve customer outcomes and portfolio health. For example, Kinara Capital reports that over 75% of its clients are first-time borrowers, yet 78% report income growth post-loan.
From Microfinance to Fintech: India’s Evolving Success Stories
India’s journey in inclusive lending has evolved across models:
- Microfinance Institutions (MFIs) laid the groundwork by proving that low-income borrowers are trustworthy. Group lending and peer accountability kept default rates low.
- Small Finance Banks (SFBs) like Ujjivan, AU, and Bandhan grew out of micro-lending missions and now offer full banking services to underserved markets.
- Fintechs such as Lending kart and Indifi scaled MSME lending with digital infrastructure, reaching customers in Tier-2 and Tier-3 cities where traditional banks hesitated.
- Government programs like MUDRA and CGTMSE reduced lender risk and improved MSME credit flows, while RBI’s co-lending model promotes collaborative innovation between banks and NBFCs.
Despite setbacks during COVID, MSME credit has rebounded—growing over 20% annually. The market is deep, the demand is real, and the delivery mechanisms are now in place.
Conclusion: The Next Fortune Awaits
C.K. Prahalad’s vision wasn’t just moral—it was strategic. Businesses that serve the underserved don’t just create impact—they unlock innovation, growth, and brand loyalty. Lending to MSMEs is not charity. It’s good business.
As India pushes toward a $5 trillion economy, MSMEs will play a pivotal role. But they need credit that’s accessible, affordable, and designed with them in mind. The lenders who recognize this—not as a compliance obligation, but as a competitive advantage—will win the next decade.
Inclusive lending to MSMEs is a rare opportunity: one that delivers returns in rupees and in ripple effects—jobs, productivity, and prosperity. It’s time to stop seeing MSMEs as too small to serve. They are the growth engine hiding in plain sight. And the road to the next fortune runs right through their shopfronts.
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