The Indian SME industry has outpaced the overall GDP growth rate for quite a while now. According to MasterCard’s Micro Merchant Market Sizing and Profiling Report, the sector contributes 45% to the country’s total GDP. Despite this, the credit inflow in this surprisingly underutilised segment has been extremely inadequate. According to International Finance Corporation, 78% of the SME/MSME debt demand is either met by self-financing or through alternative lending channels, whereas a mere 22% comes through formal lending sources.
Challenges faced by the SMEs in the current lending landscape
Several handicaps constrain the traditional lending segment, particularly when it comes to meeting the small ticket lending requirements of the Indian SME industry. In the traditional modes of lending, the FIs face high operational expenditures, low interest levels of operating staff to sell low-ticket SME loans, constraints of legacy systems with high IT vendor dependence, and limited ability to assess risk in the poorly documented and often under-reported financials of SMEs. The quality of risk assessment of SMEs reflects in the high non-performing assets (NPAs) in the sector – making it a downward spiral. SME businesses often have to apply to multiple lenders. Each application is subjected to several procedural formalities and unnecessary documentation during the loan origination, which results in long turnaround time and unforeseen delays in loan approval. Options for unsecured loans through institutional lenders are also extremely limited for SMEs – as most banks either offer only secured loans to SMEs or offer unsecured loans selectively to their own liability customers. On the other hand, the country’s informal lending sector – which also includes traditional moneylenders and loan sharks – offers quick credit but is not supervised by any regulatory body and is prone to unreasonably high interest rates, unprofessional business conduct, and harassment.
Owing to complexity and difficulty in accessing credits, SMEs often have very less choice of lenders and end up taking loan at an interest rate as high as 30%. Moreover, smaller businesses also have limited financial history and might not have detailed documentation available at hand, something which becomes a major hurdle in the loan process. Bank’s requirements of lending to only SMEs with unsecured loan history on bureau becomes a chicken-and-egg problem – currently catered to mostly by NBFCs.
Digital lending – the dark horse of SME-focussed lending
With digitisation having swept across the country, SME businesses are now increasingly leaning towards digital lending platforms. These technology-driven platforms come equipped with leading-edge assessment processes and solid tech infrastructures to precisely meet their credit requirement. It helps the SMEs on the following accounts:
i. Unconventional approaches: Instead of scanning through numerous irrelevant documents and looking at documents that are known to be under-reported, online lenders make use of credit scorecards as well as several hundreds of variables and raw data points. Some also conduct psychometric analysis of candidates and include industry proxies, financial behaviour, and non-traditional metrics for overall assessment. This lays the foundation for them to provide collateral-free loans to SMEs even with easily providable documentation – something not widely visible within the formal banking institutions.
ii. Technological advantage: Digital lending platforms make use of cutting edge algorithms in their loan assessment process. Banking on AI and Big Data, to analyse the applicant, the business, and the market that it caters to in order to ensure continuous improvement of credit models. Some of the platforms have combined strong underwriting experience with technology to create truly powerful solutions. In fact marketplaces like CoinTribe are even power some of the traditional FIs platforms now through PaaS (Platform-as-a-Service) solutions to enable them to do faster and more accurate credit assessment
iii. Minimal human intervention for quick assessment: Such platforms rely on entirely digital processes with minimal or no human intervention in the overall decision making. This eliminates the scope of human errors and makes assessments thoroughly reliable and unbiased. While, it greatly improves the velocity of credit processes it also makes credit under-writing much more scalable. Owing to their innovation-driven approach, the turnaround time for credit risk assessment has been brought down to a few minutes against days and weeks as is the norm in traditional FIs
iv. Easy application process: The use of bots and specifically designed algorithms enable digital lending platforms to scrape all the relevant information from public and private sources. This facilitates minimum paperwork during application and obviates the need for the applicant to fill exhaustive forms.
v. Loan disbursement: The loan disbursement process takes only about 2-3 days which proves to be pivotal for cash-strapped SMEs. 35% of the SMEs receive payments 3 months or later after delivering products or providing services – making quick access to working capital essential for smooth functioning and gradual scaling up of SMEs.
Most of digital lending platform are focusing on providing ‘unsecured’ loans to SMEs which has been the need of the hour as many SMEs with high potential suffer from capital starvation and are unable to take out loans from traditional FIs due to the focus on ‘secured’ loans. Its an ‘unsecured’ loan disruption that digital lenders are bringing in powered with technology to risk assess the borrowers in a much better manner and lend against the business performance and track record rather than value of a collateral. As a larger segment of the population comes under the digital aegis, the future prospects of the SME segment – driven by swift and efficient financial assistance enabled by the digital lending ecosystem – will only herald positive tidings for the long-term growth of the Indian economy.