Navigating through SME lending challenges during the pandemic
As India once again finds itself in the grip of the second wave of the coronavirus, here is how the lenders, who are directly connected to the MSMEs, can navigate through some of the most common predicaments.
As COVID-19 resurfaces in India, fintech lenders are grappling with the same sort of dilemmas all over again. Small businesses are facing an increasing set of restrictions, which brings challenges for lenders providing credit to them. In such an unpredictable environment, fintechs face a plethora of questions with no certain answers.
Here are some key points which might help them navigate these challenges.
Scaling down is not the answer
Do not look to scale down operations. Instead try shifting business to desired sectors or segments as per the macro environment. Businesses must be flexible to frequent changes as per the changing environmental dynamics. Quite a few lenders try to focus on fewer segments, which they perceive as low risk. Instead, broaden the base. Diversify the risk. Lend to a higher number of segments, thus reducing sector specific unforeseen risks.
An even better approach is to focus on scale and size of businesses rather than segments. Define the target segment as per the scale of the business, and then try to find healthy businesses within that. This sector neutral approach works well in the times of volatility.
Shift your cost base from fixed to variable
Try moving as many cost lines to variables as possible. Reduce fixed remuneration and reward employees through variable pay. This also leads to better employee productivity. One way to move towards that, is outsourcing. Process outsourcing brings efficiencies, reduces cost & makes it variable. One thing that must be ensured is that outsourcing is not done at the expense of customer experience or quality. There might be some key activities that cannot be outsourced from a compliance point of view.
Data Sciences is the key
In the current volatile environment, data sciences play a pivotal role. Processes which are based on strong data models, tend to make fewer mistakes. In lending parlance, predictive scorecards have become the backbone of new age fintech companies. AI & ML today is helping with bounce prediction, profile analysis, TAT reduction, better customer experience, early warning triggers etc. Investments in Data Sciences is no more an investment for the future. It helps your company navigate efficiently in the current times.
Monitor your credit performance
Regular & detailed portfolio reviews are imperative for building a successful lending book. In uncertain times, its importance cannot be overstated. Involve all stakeholders in such reviews. Focus on mistakes rather than success. Learn from mistakes and improve upon them.
Engage with your customers continuously. Identify ‘stressed’ or ‘likely to be stressed' customers. Offer flexible repayment options suiting the customer’s needs.
Be open to restructures before the customer defaults. Do not compromise on collections infrastructure. In stressed times, it is collections which differentiates your lending book.
Use innovations in underwriting
Try and bring in new modern tools in your underwriting approach. Use additional data points to help evaluate the customer better. Rope in relevant partners who cater to your target segment. These partners can not only give you relevant prospective customers but also a lot of data points with additional insights. Additionally, develop predictive scorecards. Artificial intelligence can spot trends which humans sometimes miss. Encourage the culture to judge a business holistically, rather than basis few formulas.
Technology is a key differentiator
In these volatile times, technology enables you to stay nimble and adaptable. Organisations with full stack technology in their processes will often find themselves, responding more quickly to changes. Cost reduction, better productivity, fewer mistakes, better TAT are just some of the few other benefits which tech enablement brings to the table.
In the times of pandemic, where companies need to be prepared with multiple scenarios, BCP, ever changing regulatory requirements etc., technology becomes the most important enabler.
More organisations fail due to liquidity challenges than any other factor. In the lending industry, this becomes even more significant. In 2020, quite a few lenders found themselves struggling on the liquidity front. As the market struggles, a lender faces liquidity challenges both from the supply side as well as collections side.
Plan well for liquidity. Always plan your liquidity as per ‘Plan B’ because the moment pandemic starts affecting businesses, your ‘Plan A’ is already out of the window. Do not spread yourself too thin & be conservative. Use co-lending as a model. Look for balance sheet partners who can help you with balance sheet funding in such times.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)
Edited by Anju Narayanan