It is reasonable to expect that the MSME sector will hold the key to India’s economic development. According to India’s annual MSME Ministry report for 2020–21, 6.33 crore MSMEs make a substantial contribution to the nation’s employment and productivity. The sector’s expansion has been hampered by the difficulty of obtaining funding, despite its importance and scope.
According to an IFC report, just one-fifth of the financing gaps faced by MSMEs were filled by formal credit, leaving 85% of MSMEs underserved in terms of credit. Access, expense, and underwriting are the contributing aspects to this problem.
Traditional lenders ask for credit histories, official records, business antecedents, and other information from MSME customers, which may keep many small enterprises out of the formal financing ecosystem. Additionally, their dispersion presents a reach and penetration issue for bigger lending institutions. As a result, India’s MSME lending market has a 16 lakh crore rupee credit imbalance (as of Q1 2020).
Owners are growing more accustomed to having their business needs serviced digitally as a result of the pandemic’s renewed push for MSMEs to formalise and digitise. According to estimations from the Reserve Bank of India, a sizable gap can be closed by digital lending that is based on data-driven credit models.
Current Scenario
The supply and demand sides of lending have changed as a result of the ecosystem-based strategy used in digital lending. Because of this, an MSME owner’s lack of a digital footprint, official paperwork, or owned properties is not a barrier. By utilising data analytics and AI, digital lenders evaluate a borrower’s creditworthiness using data mapped from economic activity, payment history, and other previous transactions. A more diverse lending ecosystem is created by these cutting-edge techniques.
The Digital Age Is Here to Stay
Here’s an example of how banks may harness the power of digital to give their SME clients an exceptional experience:
A Digital-First Approach
Current pandemic-related safety rules mandate totally digital operations. Lenders have moved the entire loan lifecycle to a digital platform as a result of this. Everything can be done remotely, including the initial application processing and loan disbursement.
Digital Automation Platform
By enabling end-to-end automation of loan operations, digital automation platforms with little code and cloud capabilities can assist financial institutions in becoming quick, agile, and ahead of the curve.
Open APIs
By contextualising a SME’s credit score via open APIs (application programme interfaces), lenders will be able to reduce credit risks and anticipate borrowing needs.
Verticalized underwriting
Another approach that hasn’t been used before is known as “verticalized underwriting,” in which online lenders work with aggregators across different industrial sectors to fully comprehend the needs and difficulties unique to each sector and offer credit products that address those issues.
Cost advantage
Lenders may pass on to borrowers the financial advantages of a lack of physical infrastructure. All of this results in a cost advantage for the lenders, which lowers the small business owner’s cost of capital.
Fintech Collaborations
Fintech collaborations give banks a way to directly access the SME loan market, which aids in the modernization of their products.
Road Ahead
India’s adoption of digital lending is still in its infancy, hence the market needs to be regulated. During the pandemic, these flaws in the system were brought to light as unregulated lenders disregarded consumer protection laws, putting borrowers at greater financial danger than they were already at. Information asymmetry continues to be a pressing problem that requires attention if we are to fully realise the promise of digital lending in India. The RBI recently established a working committee to develop a regulatory framework that strives to safeguard borrowers without stifling lender innovation.
To Conclude
The transformation brought on by digital lending is altering how SME financing is seen. A business decision that was once difficult and time-consuming is now simple to make. A win-win-win scenario exists when the underserved are empowered through capital inclusion, benefiting the lending environment, MSME borrowers, and the Indian economy as a whole.
(The author is Mr. Rohit Arora, CEO & Co-Founder, Biz2Credit & Biz2X and the views expressed in this article are his own)
