Fintech- A Solution to the Credit Gap in the SME Space
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In a world where your shopping cart is digital - from groceries to clothing and now to loans, Fintech companies have come a long way in establishing themselves as the harbingers of future monetary exchanges. But in this newly created world of convenience, the companies that provide these products and services require funding to stay afloat. This is something SMEs in the country have struggled with. Yet, it is this segment of companies which drives the economy, GDP and employment of most countries around the world. To address this problem, new solutions from the Fintech space are proving to be an effective solution for SMEs.
A report published by the Ministry of Micro, Small and Medium Enterprises in 2015-16 states that there are 51 million MSMEs in India. The sector contributes 7per cent to India’s GDP while accounting for 45per cent of the total manufacturing output and 40per cent of the exports from India. However, there is currently a capital shortage of approximately INR 32 trillion in this sector according to an estimate by International Finance Corporation. The Indian Government has been working towards mobilising credit and funding for SMEs in the country, but banks have largely not been open to this. By leveraging this need an existing gap, Fintech startups have stepped in with digital-centric solutions to aid this funding process.
The SME sector has, so far, been untapped by formal financial institutions, and, as a result of an only 3per cent of SMEs avail credit through banks or traditional non-banking finance companies (NBFCs). SMEs have faced issues pertaining to funding from banks and other formal institutions. This is due to the absence of what is considered to be a traditional credit rating based on bank transactions, as well as lack of sufficient collateral.
Massive Paper Work
Additionally, under the traditional approach, SMEs have to go through a tedious process with documentation, multiple visits to banks, and paperwork. Due to these factors, they take to moneylenders who impose very high-interest rates. Hence, it compromises on what these SMEs can put into manpower and infrastructural upgrades for day-to-day operations.
Now, Fintech companies are driving financial inclusion through the growing digital landscape in the country. They employ data and digital technology, using AI algorithms to prepare credit ratings for SMEs. They have implemented changes in credit underwriting, based on data related to digital footprints other than those of bank-related credit scores, making it more inclusive. The fact that all documentation is done online helps reduce Turnaround Time (TAT) for the approval of the loan since it is streamlined. These platforms also enable the customisation of loans, which is a benefit to SMEs who are more likely to have fluctuating income.
Fintech startups have also brought forward alternative lending options for SMEs with Peer to Peer (P2P) marketplaces. Here, borrowers and lenders are connected directly. Now, since many P2P marketplaces have earned the license from the RBI to run as NBFC P2Ps, there has been an increase in awareness and, consequently, a great rise in loan disbursements from these marketplaces. According to a 2017 report by PWC, the estimated P2P lending to be generated in India from 2017 to 2022 is USD 4 billion, which is 160 times the lending size in 2017.
Fintech solutions like P2P Lending have already begun the journey to provide credit to the SME segment, that is untapped by formal financial institutions. This is bound to grow further, especially with the rise in use of technology in Tier II and Tier III cities. There is, therefore a need for SMEs to acquire funds to tailor their approach to wider platforms, geographies, and relative capacities. This is where alternative lending platforms will play a major part in facilitating SMEs to contribute to the growth of the Indian economy for years to come.