Bridging the $20 billion credit gap

By Staff Report December 6, 2024 6:20 pm IST

India’s journey toward economic growth and industrial modernisation faces a critical roadblock: a staggering $20 billion credit gap in equipment financing. This funding shortfall hampers businesses, particularly MSMEs, in acquiring the machinery and tools necessary to thrive in a highly competitive global economy. Addressing this gap will drive productivity, foster innovation, and accelerate India’s economic ascent.

Understanding the credit gap The scale of India’s equipment financing shortfall is massive. With over 63 million MSMEs contributing nearly 30% to the GDP, their lack of access to essential equipment financing limits their ability to scale operations and improve efficiency. Without the requisite machinery, the manufacturing, construction, and agriculture sectors struggle to reach their potential.

Several systemic challenges contribute to this significant credit gap. Lenders do not view equipment financing as productive asset financing, a critical gap in the lending ecosystem. Additionally, many small and medium enterprises need more collateral, deterring lenders from extending credit. Financial institutions often consider equipment financing as high-risk due to the uncertainty of asset utilisation and potential depreciation. Furthermore, many micro-equipment assets remain unfunded, primarily due to challenges in understanding their identity or the fragmented nature of their distribution systems. Traditional financing methods also involve lengthy and tiring procedures, discouraging MSMEs from seeking loans.

A bridge to increasing financing solutions

Addressing this issue requires a multipronged approach. The government must expand initiatives like the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) to include equipment financing and mitigate lenders’ risks. In other words, through policy support and subsidies, the government is the first line of defence in the war to overcome credit starvation.

Fintech firms and NBFCs that serve the MSME segment are well-positioned to play a transformative role. By leveraging cashflow-based underwriting models, they are actively bridging this gap, particularly in underserved tier-2 and tier-3 towns, where financing micro-equipment assets can be a powerful catalyst for economic growth. Through tailored financing solutions such as pay-per-use models, revenue-based repayment schemes, and the integration of advanced technology for loan processing, NBFCs can enhance accessibility and meet the diverse needs of MSMEs.

Additionally, building partnerships with OEMs and utilising sector-specific data allows companies to design innovative, customised financing models. This ensures that credit reaches the last mile, empowering MSMEs to scale operations efficiently.

The benefits of a strong equipment financing ecosystem

Closing the $20 billion credit gap is a dream that can only be achieved by taking a mixture of small and big leaps, unleashing a ripple effect of benefits across India’s economy. Access to modern equipment will increase productivity and efficiency and drive the profitability of businesses. Expanding business operations also increases employment opportunities, especially in labour-intensive industries. Moreover, a robust equipment financing ecosystem would empower MSMEs, the backbone of India’s economy, for sustainable development and global competitiveness.

Bridging India’s equipment financing gap is an economic necessity and strategically imperative. By adopting innovative solutions, simplifying access, and fostering public-private collaboration, India can create a financing ecosystem that fuels entrepreneurship, drives industrial growth, and secures its place as a global economic powerhouse. The time to act is now, as every step toward closing this gap is a step toward realising India’s vast potential.