Why Investors Are Turning To Fintechs Solving India’s SME Credit Gap?

India's SMEs face a credit shortfall running into an estimated trillion dollars. Traditional banks are generally cautious about lending to the Indian SMEs due to limited margins, limited collateral, thin credit history, and high underwriting costs. This has left a huge gap where fintechs are increasingly stepping in.

New-age fintech lenders approach the problem very differently from banks. They tap into rich data sources such as GST filings, bank statement analytics, cash-flow insights, and alternative datasets like POS transactions, invoicing records, and utility payments.

"Credflow—an Inflexor portfolio company—exemplifies this new model. By integrating directly with a customer's accounting system, Credflow gains visibility into bank transactions, cash-flow cycles, COGS, and inventory aging. This enables precise risk assessment, profitable lending to smaller ticket sizes, and faster turnaround decisions," said Murali Krishna Gunturu, partner at Inflexor Ventures.

A profitable lending business is built on two pillars - robust underwriting mechanisms and strong distribution channels. The data available to new age fintechs helps them underwrite better and the rapidly evolving digital acquisition channels help them reach SMEs more efficiently.

Notably, SME lending offers stronger yields than traditional consumer lending. And with disciplined, data-driven underwriting, NPAs in SME portfolios can often be lower than those in consumer credit.

At the same time, both the Government of India and the RBI have been actively encouraging increased credit flow to SMEs to support grassroots entrepreneurship and economic growth, says Murali Krishna.

All this taken together, we believe that SME focused fintech lending presents one of India's next trillion-dollar opportunities - poised to be unlocked over the next decade

Why Digital Lending Is Key to India's Financial Inclusion Journey?

Even though India's SME sector is quite large, collateral constraints, lack of consistent financial information, and the slow pace of manual processes in traditional lending have resulted in a considerable credit gap. Investors have started backing fintechs because they have developed new approaches to mitigate these challenges.

"Instead of focusing on the assets and the current lending practices, cash-flow-based underwriting, GST, alternative data, and AI-derived risk assessments utilized by modern fintech firms have shifted the lending focus to those who have been traditionally unbanked or underbanked. This has been the basis for unlocking a new lending paradigm to a previously untapped and unserved borrower. Investors have highlighted the efficiency and scalability of digital lending mechanisms," said Shashi Bhushan, Chairman of the Board, Stellar Innovations.

Operating costs have decreased, decisions are made instantly, and reach has expanded into Tier II-III markets where credit demand is also rising. Automation through digitized KYC, instant documentation, and continuous surveillance has proved that fintechs have created a more compliant, transparent, and low-risk ecosystem.

Shashi Bhushan says fintech firms have been and will continue to transform lending in SMEs as digital infrastructure continues to deepen. There is now a belief that fintechs will provide more than just loans but will enhance civil and financial inclusivity and aid in the growth of the economy.

The $700 Billion Opportunity: Why Bharat's SME Credit Market Is Ripe for Disruption?

Kulmani Rana, Founder & CEO, Fibonacci X says we have evaluated several early-stage startups for acceleration over the last 12 months. Our team has learnt that in Bharat, merchants need to roll out credit to grow the business. SMEs (both B2B and B2C) run on informal credit, and annually, ~US$ 700bn is disbursed in credit.

The total number of merchants is ~60mn+, and there are several issues with SME credit now:

• Goods are sold on credit to boost sales: no organized way to gauge payback intent and poor visibility on the collection date.
• Following up with borrowers is a major problem area: wastage of resources and delay in supplier payments.
• Collecting money and depositing it in the bank is a hassle now.

There is a massive revenue opportunity, and several startups are trying to establish themselves as the go-to platforms for automating collections and payments. Given this situation, it will not be an understatement to say that several successful startups are expected to emerge in this segment in the coming decade.

India's $530B SME Credit Gap: The Biggest Economic Unlock of This Decade

Nikhil Parmar, Founder - Impactful Pitch® & Instapitch.io, says India's SME credit gap isn't just a market inefficiency, it's one of the biggest unlocks of this decade.

SMEs contribute nearly 30% to India's GDP and employ over 110 million people, yet face a $530B credit shortfall. And here's the part most people outside the ecosystem don't realise, this gap isn't because SMEs are "risky."

It's because the system was never designed to understand their cashflows.
Founders building SME-focused fintechs today are doing something fundamentally different:

• They underwrite using GST trails, transaction-level data, and working capital cycles
• They price risk through behavioural models, not outdated collateral rules
• They embed credit directly at the point of demand, in supply chains, payments, ERPs

"This shift is why investors are pivoting hard toward this space. In 2024 alone, SME lending fintechs raised $1.8B+, and Bain estimates the digital lending market will reach $250B by 2030," said Nikhil Parmar.

"What I personally find exciting is this: the founders winning here are the ones who've sat inside small businesses, understood their volatility, and built products aligned with how SMEs actually function, not how banks wish they functioned," Nikhil Parmar added.
For investors, this is no longer about chasing "fintech TAM." It's about backing solutions that strengthen the backbone of the Indian economy.

If you can prove repayment behavior and usable underwriting data at even a small scale, investor conviction follows very quickly. Solving the SME credit gap is not just a fintech play. It's India's economic multiplier.

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