Tech-ing on the Credit gap: How Start-Ups are Using Technology and Alternative Lending Strategies to Enable Seamless Credit Access to Indian MSMEs
By Alok Mittal
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The fact that the MSME sector is one of the biggest growth drivers for the Indian economy has been reiterated regularly over the years, and for good reason. It accounts for more than 45per cent of the total manufacturing output in India and over 40per cent of the country's exports. MSMEs also contributes around 8per cent share of the national GDP, apart from generating almost 70per cent of the total employment opportunities in India.
There is, however, another factoid that manages to outdo the aforementioned statistics: the massive credit gap faced by MSMEs. According to a recent report by International Financial Corporation (IFC), small businesses in developing economies need more than $2 trillion to fulfil their working and growth capital requirements. The World Bank estimates a credit demand-supply gap of $380 billion in India alone. Despite making such a significant contribution to the country's economy, businesses in the MSME sector find it tough to secure access to operational capital.
Where's the Money?: Understanding the Reasons Behind India's MSME Credit Gap
Why does this gap exist? Because traditional banks and NBFCs consider MSMEs a risky lending proposition. A large percentage of Indian MSMEs don't maintain a consolidated record of their financial data such as tax returns filings, P&L, and transactions. With institutional lenders having little to no visibility into MSME finances, their underwriting mechanisms fail to accurately gauge the creditworthiness of potential borrowers. Moreover, since small businesses often don't own substantial physical assets, traditional BFSI players are unable to offset the risk to capital and end up rejecting most MSME loan requests.
Excessive documentation requirements, as well as the time taken for the loan to finally be approved under the conventional loan application process, also puts a lot of prospective MSME borrowers off. Most micro, small, and medium businesses operate as part of a forward supply chain; products and services are delivered immediately, with the payment taking anywhere between 30 and 90 days to be cleared. Such businesses don't have a large capital corpus, to begin with and operate on very fine financial margins, making it necessary for them to have immediate and urgent access to working capital to meet their day-to-day expenses, such as paying staff salaries, suppliers, and utility bills. Conventional working capital loans can take up to several weeks to approve and disburse, making them unsuitable for MSME working capital requirements.
How fintech Start-ups are Addressing the MSME Financing Challenge
This is exactly where alternative digital lending solutions offered by players in the fintech domain have been coming to the rescue of Indian MSMEs. By leveraging cutting-edge digital technologies, data analytics, and proprietary underwriting algorithms, fintech start-ups can assess vast volumes of data points – both conventional and nonconventional – pertaining to prospective borrowers. Such in-depth access to borrower information allows new-age lending platforms to create more accurate borrower profiles, even in the absence of financial records or previous credit history, granting seamless access to credit and financing opportunities to hitherto unserved and underserved MSMEs.
The tech-led approach followed by digital lending platforms also streamlines and optimises the loan process. Once the in-principle approval of a loan is granted, the borrower on-boarding is conducted with minimal documentation. Automation and machine learning-based algorithms also drastically shorten the underwriting process, allowing loans to be disbursed as soon as 24 hours after the application. Repayment terms for such alternative loans, as opposed to conventional working capital loans, are quite flexible and allow MSME borrowers to make EMI payments as per their convenience. The digital-led mode of the transaction also reduces operational and overhead costs for fintech platforms; these benefits are also passed onto MSME borrowers in the form of lower interest rates.
Further, leading digital lending platforms to utilise technology to create unique loan products customised to the varied requirements of the Indian MSME sector. Another innovative alternative fintech lending solution is that of ecosystem-based lending. MSMEs are invariably keyed into bigger supply chains, whether as suppliers or customers. Digital lending platforms are now partnering with large corporate organisations to use the data that exists within these supply chains. Doing so not only enables them to more accurately underwrite MSME borrowers but also deliver highly-customised financing solutions at their point of need.
Moreover, since such ecosystem-based loans can be availed as an integral part of the financial transaction itself, MSMEs are motivated to access and consumer credit. This increased credit appetite will, in turn, drive business growth both within the MSME sector and along the supply chain, whilst also stimulating economic activity on a much larger scale.
To end where we began, the MSME sector forms the very foundation on which the Indian economy is built. It has helped the country tide over business disruption caused by global financial crises and large-scale economic reforms. Fulfilling its credit requirements is, therefore, critical to ensure that India continues on its current trajectory as a major global economic superpower. Armed with innovative, tech-led alternative lending solutions, fintech lending platforms have emerged as long-awaited enablers of growth – for MSMEs, for the Indian start-up ecosystem, for the larger economy.
