Fintech for MSMEs and Rural Markets- Bridging Credit Gaps and Driving Financial Inclusion in India | Episode 48
Digital invoicing, neo banks, AI led solutions, MSME focussed lending companies and innovative payment solutions are changing how the rural businesses operate and grow
India’s Micro, Small, and Medium Enterprises (MSMEs) are the backbone of the economy, contributing approximately 30% to GDP, 45% to exports, and employing over 120 million people. With 63.39 million MSMEs, of which 99% are micro-enterprises, and nearly half located in rural areas (32.49 million), these businesses are critical to economic growth. However, MSMEs face a significant credit gap, estimated at ₹20–25 trillion, due to limited access to formal financing, inadequate financial records, and traditional lenders’ risk-averse approaches. Rural India, home to 324.9 lakh MSMEs, further amplifies these challenges with lower banking penetration and digital infrastructure gaps.
Fintech solutions, leveraging technologies like digital invoice financing via Account Aggregators (AA) and neobank platforms like Niyogin or Open, are transforming this landscape. These innovations address credit gaps by offering accessible, efficient, and tailored financial services, aligning with the government’s goal of expanding card acceptance infrastructure to 25 million points by 2025.
This episode explores how fintech is empowering MSMEs and rural markets.
The MSME Credit Gap and Rural Challenges
MSMEs in India face a structural credit deficit, with over 60% relying on costly informal sources like moneylenders. The International Finance Corporation’s report estimated a total MSME financing demand of ₹87.7 trillion, with a viable debt demand of ₹36.7 trillion, of which only 16% is met by formal lenders. Key barriers include:
Lack of Collateral - Most micro and small businesses lack fixed assets or land, limiting their ability to qualify for secured loans.
Inadequate Financial Records - Informal bookkeeping, cash-based operations, and GST non-compliance make credit assessment difficult.
High Perceived Risk - Lenders view MSMEs, especially first-time borrowers, as high-risk due to business volatility and lack of credit history.
Limited Rural Reach- Over 32.5 million MSMEs are in rural areas, where traditional banking infrastructure and digital literacy are poor.
High Transaction Costs - Lending to MSMEs involves high underwriting costs relative to ticket size, making it less profitable for banks.
Rural MSMEs, comprising 51% of the sector, face additional challenges like poor internet connectivity and reliance on cash-based transactions. The large and persistent credit gap has several cascading effects on the Indian economy:
Stunted MSME growth: Inability to invest in inventory, machinery, or skilled labor limits productivity and expansion.
Dependence on informal credit: Over 60% of MSMEs rely on high-interest, informal sources like moneylenders.
Delayed formalization: Without access to formal finance, many MSMEs remain outside the tax and compliance system.
Gender and rural exclusion: Women-led and rural enterprises face even higher barriers to credit access.
The government’s Digital India campaign and Jan Dhan-Aadhaar-Mobile (JAM) Trinity have improved financial inclusion, opening 500 million bank accounts, but 80% of India’s population remains underbanked and severely credit starved, particularly in rural areas. Fintech solutions are bridging these gaps by leveraging digital platforms, alternative data, and innovative financing models.
Fintech Solutions for MSMEs and Rural India
Fintechs are revolutionizing MSME and rural financing through tailored products like digital invoice financing, neobanking, and payment solutions. These align with the government’s target of 25 million card acceptance points by end of 2025, part of a broader push for a 50% CAGR in mobile-based transactions and a 150% increase in Prepaid Payment Instrument (PPI) transactions. Some of the most well-known solutions are -
1. Digital Invoice Financing
Digital invoice financing allows MSMEs to borrow against unpaid invoices, addressing short-term liquidity needs for payroll, inventory, or debt repayment. The RBI’s Account Aggregator framework, launched in 2016, enables consent-based financial data sharing between Financial Information Providers (e.g., banks) and Financial Information Users (e.g., lenders). With 23 banks onboarded and 1.1 billion accounts eligible, AA streamlines credit evaluation by centralizing transaction data, reducing paperwork and improving access for MSMEs.
How It Works: MSMEs upload invoices to AA-integrated platforms, which verify transactions and share data with lenders. Funds are disbursed quickly, often within 24 hours, using invoices as collateral.
Benefits: Enhances cash flow, reduces reliance on informal credit, and supports rural MSMEs by leveraging digital records.
Market Impact: The global factoring-based credit market is projected to grow from $1.5 billion to $15.4 billion by 2025, driven by e-invoicing and regulatory support.
There have been multiple players in the space which has made significant progress in reducing the working capital stress. Players such as Credable, Mintifi, Credflow and more have been very active here. The segment continues to see good investor interest as well.
2. Neobank Platforms
Neobanks, operating entirely online without physical branches, offer low-cost, accessible banking services tailored to MSMEs and rural users. Platforms like Niyogin/Open provide digital onboarding, collateral-free loans, and integrated tools for accounting, GST invoicing, and cash flow management. Neobanks target underserved segments, including thin-file MSMEs and rural entrepreneurs, using alternative data for credit scoring.
Key Features: Mobile-first interfaces, no minimum balance fees, real-time cash flow monitoring, and bundled services like payments and lending.
Rural Impact: Neobanks leverage India’s 92% increase in mobile banking volume (2017–2018) to serve underbanked rural areas, offering microloans and payment solutions.
Market Potential: The neobank market is forecasted to grow at a 46.5% CAGR from 2020 to 2026, with India as a key growth driver.
3. Payment and Card Acceptance Solutions
The government’s goal of 25 million card acceptance points by 2025 aims to boost digital payments, particularly in rural and semi-urban areas. Fintechs are deploying affordable Point-of-Sale (POS) terminals, QR code-based payments, and UPI-integrated solutions to enable MSMEs to accept card and digital payments.
Impact on MSMEs: Increases revenue by attracting digital-savvy customers, reduces cash dependency, and generates transaction data for credit assessments.
Rural Reach: UPI’s growth to 10.58 billion transactions in August 2023 supports rural MSMEs by enabling low-cost digital payments.
Players such as BharaPe, Pine Labs, Mswipe and others have been very active here. Although the business model still revolves primarily around lending use cases, I do see some very exciting development here, especially payments on ubiquitous platforms such as Whatsapp. Keenly looking at the space.
4. Digital lending platforms
There has been a slew of players, doing both secured and unsecured lending in the ecosystem, which has changed the way small town businesses operate. Easy, digital with super fast processing times (1-3 days compared to weeks earlier), low documentation need and deeper reach has been the key factor in favor of new age fintechs here.
Impact on MSMEs: One of the biggest impact that we have seen here is the increased ability to hold more inventory and freeing up of cash otherwise stuck in working capital. We see easy 15-100% increase in monthly revenues of smaller players when they get access to business loans.
Rural Reach: UPI’s growth to 10.58 billion transactions in August 2023 supports rural MSMEs by enabling low-cost digital payments.
Players such as CredRight (our portfolio) has made some serious difference here. Secured LAP players have also been doing good here. Expect to see more players getting interested here because of the sheer size of the opportunity present.
Addressing Credit Gaps in the sector
Fintech solutions address MSME credit gaps through a number of ways, some of which are -
Alternative Data: Platforms like Niyogin and Lendingkart use utility bills, online sales, and transaction data to assess creditworthiness, bypassing traditional collateral requirements.
Fast Disbursal: Digital invoice financing via AA and neobanks like Open delivers funds within hours, compared to weeks for bank loans.
Flexible Terms: Companies such as CredRight, Finova and Arthan offer tailored loans for rural MSMEs, accommodating seasonal cash flows.
Lower Costs: Neobanks eliminate branch overheads, offering low/no-fee services, while invoice financing reduces reliance on high-interest informal loans.
These solutions have reduced non-performing loan ratios to as low as sub 4% in some fintech models, compared to higher rates in traditional lending. The 2025 Union Budget’s doubling of credit guarantee coverage to ₹20 crore for MSMEs further supports fintechs by mitigating lending risks.
Supporting the 25 Million Card Acceptance Goal
The government’s target of 25 million card acceptance points by 2025 aims to mainstream digital payments, particularly in rural and semi-urban areas. Fintechs like Pine Labs and Razorpay are pivotal:
Affordable POS Devices: Pine Labs deploys low-cost POS terminals, enabling small retailers to accept cards and UPI.
UPI Integration: Razorpay’s QR-based solutions allow rural MSMEs to accept payments via UPI, which processed 10.58 billion transactions in August 2023.
Merchant Financing: Both offer working capital loans tied to transaction data, incentivizing digital payment adoption.
These efforts align with India Stack’s APIs and the JAM Trinity, which have driven financial inclusion by integrating Aadhaar, UPI, and mobile connectivity. By generating digital transaction records, fintechs enhance MSMEs’ creditworthiness, further closing the credit gap.
Regulatory and Ecosystem Support is pretty robust here
The RBI’s Account Aggregator framework is a cornerstone, with licensed AAs like Cams Finserv, FinSec AA Solutions, and Cookiejar Technologies facilitating data sharing. The Trade Receivables Discounting System (TReDS), including platforms like Invoicemart, supports invoice financing by connecting MSMEs with corporates and financiers. Government initiatives like the Digital India campaign and GST incentives for MSMEs promote digital adoption, while the RBI’s Regulatory Sandbox allows fintechs to test solutions like video KY
Challenges and Opportunities in the space
Despite progress, challenges persist. Some of the common challenges that have been observed in the space are -
Digital Literacy: Rural MSMEs often lack the skills to use fintech platforms.
Infrastructure Gaps: Limited internet connectivity in remote areas hinders adoption.
Regulatory Scrutiny: Increased RBI oversight may raise compliance costs for fintechs.
Data Privacy: The upcoming Digital Personal Data Protection Act (DPDPA) requires robust data governance.
The above also means that there are certain opportunities in the space, including building low data need products, using AI along with vernacular language to serve more customers as well as using existing networks such as whatsapp to build more payment use cases could usher in next round of growth here.
By 2025, India’s digital lending market is projected to reach ₹12 trillion, with fintechs capturing a growing share of the $1.5 trillion fintech industry. The MSME sector is expected to contribute $1.3 trillion to GDP by 2026, driven by fintech-enabled credit and digital payments. Neobanks and invoice financing platforms will continue to democratize finance, particularly in rural areas, supported by AA and TReDs.
Fintech solutions like digital invoice financing via Account Aggregators and neobank platforms are transforming MSME and rural finance in India. By addressing the ₹20–25 trillion credit gap, these innovations empower 63.39 million MSMEs, particularly the 32.49 million in rural areas.
As India’s digital economy grows toward $1 trillion by 2030, fintechs will remain pivotal in driving financial inclusion, fostering MSME growth, and building a resilient economy. This also means there will be amazing wealth creation opportunities in this space.
We are keenly exploring this space at UNLEASH and would love to talk to you or your known ones, if they are building in the space. Reach out to me at abhishek.kumar@unleashcp.com
Disclaimer – The views presented here are my own and doesn’t reflect views of my employer in any way and it shouldn’t be construed as that in any way whatsoever.