Opinion

How banks can be the game changer for the SME lending business

Aparajita Choudhury
5th Apr 2019
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Micro, small and medium enterprises account for more than 80 percent of the total industrial enterprises, employ an estimated 117 million people, and contribute more than 40 percent to manufacturing output and exports, according to a report by World Bank. The statistics throw light on the significance of providing inclusive economic growth for MSMEs.


The report says one million people enter the labour force every month in India. The fate of most of them will be dependent on the potential of MSMEs that are often touted as having the capability to fuel wage employment and entrepreneurship. However, inadequate access to finance poses impediment for small enterprises to grow, compete, and generate employment.


Since SMEs contribute to the economic growth of the country, addressing their financial need is no more a necessity but is crucial for banks. Moreover, small businesses form a significant customer segment that banks cannot afford to lose to alternative SME lenders. Restructuring the SME lending business has become the need of the hour for banks now.                                                                                                                           

Why is procuring a loan still a challenge for SMEs?  

Expensive means of procuring credit, complicated procedures legacy institutions still hold on to, information asymmetry, lack of documents to prove creditworthiness, and lack of awareness about the existing products and services are some of the primary reasons. When it comes to addressing lack of credit accessibility using advanced technologies, conventional and legacy banks are yet to pick up pace as compared to new-age fintech startups and alternative lending platforms.                                                                                                                   

Borrowing funds becomes tougher for small businesses when they are incapable of demonstrating themselves as big-size enterprises with long-term goals, diversified businesses, and strong financial structures. All these factors add fuel to the lack of transparency with regard to the creditworthiness and lead small businesses to rely heavily on informal sources of credit.                                                                                                                                                           

Most of the time, banks find it hard to consider SME loans as a low-risk proposition because of the higher default rate (owing to the lack of documents on balance sheet, credit score, cash flow, income statements, operating performance, etc.) SMEs initially face time constraints, and approaching multiple banks for a loan and waiting for weeks to get the loan approved add to their stress. Even if the banks agreed to disburse the loan, the entire cycle - from loan origination paperwork to loan approval - is a hassle-filled and time consuming task.


Timely and adequate infusion of capital is very crucial for SMEs to prevent impediments in their growth trajectory, especially in the early and growth stages. Because of the heterogeneous nature of small business, banks find it difficult to set standards in terms of assessing the loan. And most of the time, they are very reluctant to lend based on a long-term relationship with borrowers.                                                                            

Manual data entry and collection using Excel sheets often leads to fragmented maintenance of data and consume longer time to communicate a lending decision to borrowers. Lack of proper integration of data management solution with the loan origination system makes the loan disbursement process unwieldy. 


Underwriting SMEs is an expensive and time-consuming affair for banks because the cost and underwriting process for all the borrowers (irrespective of the size and value) are similar.


Restructuring the SME lending business 

Choosing the route of embracing digitalisation with the introduction of online loan application, automated loan approval process, and creation of an online platform will help banks accelerate the SME lending process. Moreover, they should start offering personalised advice on banking products and services to small businesses and assist them on solving various business issues.


Maintaining existing relationships with the potential SME customers requires banks to segment small business based on the number of customers, business types and profiles, products, and credit history. Putting equal efforts and time to asses all the SME segments might raise red flag for banks to come to a final lending decision.


The evaluation and review mechanism of the loan application should be automated, saving the time of credit analysts, cost of loan process, and streamlining the decision-making process. Integrating automated underwriting platforms will enable banks gain competitive edge in the fast-paced digital world.  


Banks should extend their helping hand towards early stage SMEs by providing value-added services, mentorship, guidance, and support system. More than just funding, small businesses require business management tools and advice on how to diligently spend working capital.


Building an online platform equipped with self-service capabilities like simplified online application, document imaging, online assessment of creditworthiness, and digital interchanging of documents across the entire lending cycle will make loan disbursement process much simpler and quicker.


Small businesses often go through multiple challenges in various stages of financial growth and therefore seek customised solutions. Remote virtual interaction with relationship managers of banks might be a huge relief for small businesses (irrespective of the geographical location). Banks can initiate such interaction through online tools and allow SMEs to book appointments online.


A plethora of unstructured data is available in business bank accounts of SMEs, which can be leveraged using advanced technologies like artificial intelligence, data analytics, and big data tools to improve the lending decision and better assess the creditworthiness of the borrowers.


Government initiatives: a ray of hope

Last year, Finance Minister Arun Jaitley announced the launch of a new portal to fast-track loans for MSMEs. Banks under this initiative will approve loans up to Rs  crore within an hour without the requirements of physical branch visits by entrepreneurs. All they need to do is to submit GST and income tax details; the loan will get disbursed within eight days.


Small Industries Development Bank of India (SIDBI) set up the portal along with SBI, PNB, Bank of Baroda, Indian Bank, and Vijaya Bank. SIDBI also offers loans to SMEs without collateral to the extent of Rs 1 crore. World Bank, in a bid to address the financial constraints for small business in India, approved a $550 million loan in 2015.  The project, according to a World Bank Report, aims to support the development of innovative financial products to franchisees as well. The World Bank is also supporting SIDBI’s effort to financing SMEs by providing a credit line of $500 million. The MSME project of the World Bank had, as of March 2017, disbursed loans of $265.38 million to MSMEs in India.


Similar to this scheme, the government has launched many such initiatives to provide financial aid to SMEs such as Pradhan Mantra Mudra Yojana (PMMY), Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), etc.

           

Sustaining a leadership position and becoming a game changer calls for unlearning legacy practices and restructuring the SME lending business. In the world of digital and alternative lending, small businesses switch banks very fast for quick and customised services that can support their growth at every stage of business. With the alternative SME lenders infusing innovation in every aspects of the SME lending lifecycle, banks can’t afford to be complacent about taking initiatives to address the credit gap among SMEs and must improve the experience through the entire lending cycle. 


(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.) 


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