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How MSMEs can Ensure a Higher Loan Approval Rate As NBFCs target MSMEs for lending, here's what you can do to get your loan approved

By Manish Khera

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Shiv is a rather enterprising chaiwalla, catering to the small offices in New Delhi's East of Kailash locality. In the narrow bylanes and tightly-packed old buildings in the area, he can be seen carrying his kettle and Styrofoam cups to play his part in the daily routine of hundreds of professionals in the area. When people occasionally asked him to fetch snacks from nearby stalls for them while on his rounds, Shiv's entrepreneurial spirit came forth. He started buying biscuits and making bread pakoras, and an assortment of other snacks and selling them to his customers. This helped him make more money, which he used to buy a smartphone. Now, a few minutes before he enters an office, a WhatsApp group run by him for each office announces his impending arrival. People line up to get a tasty snack and a fresh cup of tea to start their day at work.

"I am very happy that my business is doing better, but it is becoming difficult to cater to everyone. I want to hire boys to take over part of my route, but I need money to buy more pots and pans, more raw materials and of course pay the salaries of the staff I hire. Even the first time when I started selling snacks, I tried to see if I could get a small loan from a bank. But because I didn't have a bank account, I was told that it would just not be possible", recounts Shiv. However, now armed with his smartphone, he intends to rely on a new-age NBFC startup to get a loan to expand his already rapidly-growing business.

Shiv isn't alone – several medium and small enterprise (MSME) founders and owners are increasingly reliant upon Non-Banking Financial Corporations (NBFCs) for credit. NBFCs already account for more than 16% of the credit extended to MSMEs, and this percentage is expected to rise to 22-23% by March 2022 according to research conducted by ICRA. Even as the share of lending by public sector banks has fallen by nearly 7% between March 2017 and 2018, the total credit being disbursed to MSMEs has increased thanks to the contribution of these NBFCs.

These companies have been able to disburse funds to applicants without a bank account or a long transaction history, as they collect data from various other sources for evaluation. Some of the most prominent NBFC lenders to MSMEs are new-age technology-driven startups, and these companies are deploying cutting-edge AI-driven algorithms to evaluate this and other contextual data to arrive at a credit score for applicants. This means that the process of getting a loan from these organizations follows a different process than it would in legacy BFSI institutions. Here is what entrepreneurs and MSME owners across India can do to make it easier for themselves to get much-needed credit from these companies:

Going Digital

Since many of these lenders are looking to use digital data collection methods, having an MSME's basic business information in a digital form is definitely beneficial. Ideally, MSME owners should make the transition towards being capable of transacting digitally, or at least of recording their transactions digitally. MSME owners should recognize that this is the coming paradigm, and that adopting it early will help them as well. According to a Google-KPMG study, MSMEs that go digital grow twice as fast, tend to cater to more markets, and employ up to 5x more employees compared to offline MSMEs. Startup lenders would find it easier to access MSME data and evaluate credit more easily, too. Leading MSME lending companies like Happy Loans often rely on partner companies that are enabling digital payments for MSMEs, meaning that going digital could itself be the best avenue to get credit too.

Getting the Documentation You Need

In the past, this was one of the biggest problems with receiving credit – an almost unending list of demands for various documents, copies, and certificates from various authorities were required before your application was even considered by legacy lending institutions. Thankfully, this process is much easier with startups than traditional lenders. However, there is still the need for a few documents. MSME owners looking to get loans from these startups will find it easier to get the loan if they have business registration proof, bank statements, a PAN card, and the owner's Aadhaar card. MSME owners should also ensure that their mobile phone number is linked to the Aadhaar, as it would help the startups go through the verification process faster. Some of these companies will conduct the entire process digitally, so having digital and accredited versions of these documents would also be helpful.

Have a Clear Plan for Funds

Even though these startups are disrupting and reimagining the lending process and industry, they are still working with the same basic motivation – a reasonable return on the money they invest into MSMEs. As such, all lenders would be interested in how an applicant intends to use the capital provided to them, and how they intend to use it.

Leading providers will usually have a variety of innovative credit products catering to specific needs – short-term single day of weekend loans, working capital lines of credit, and so forth – and applicants can just select the product that best matches their requirements. But for longer-term and more open-ended credit requirements, they will need to clearly express how they intend to convert that capital infusion into greater profit. Having a clear plan for the capital – one that accounts for seasonal and other variations that might occur during that time period, both good and bad – would reassure lenders and make the loan application process smoother.

Manish Khera

Founder & CEO, Happy

A powerhouse of microfinance and micropayments knowledge, Manish Khera is the CEO and Founder of Happy, one of India’s most innovative loan facilitators. He spearheads operations at the organization and devises the overall strategy, ideates new products and offerings and leads the fund raising initiatives. With over 25 years of experience in the banking and financial sector, he has been an investor and advisor to several banking, technology and impact related ventures.
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