Leveraging On Fintech To Solve the 'Creditworthiness' Issues Among MSMEs In India The traditional lending cycle is time-consuming, involves excessive documentation including but not limited to registration proof, income proof, bank statement, business plan, MSME certificate, etc., and many MSMEs may not have all these documents

The going was already tough for micro, small and medium enterprises (MSMEs) in India to raise capital. The pandemic started straining small businesses which led to unprecedented job losses and business closures. During such crises, the inability of MSMEs to digitize and transform their business has been primarily due to a lack of easily accessible, affordable, and timely financing.

The traditional lending cycle is time-consuming, involves excessive documentation including but not limited to registration proof, income proof, bank statement, business plan, MSME certificate, etc., and many MSMEs may not have all these documents, thus leaving them without any financing option.

Traditional institutions have not been able to cater to MSMEs credit requirements, since they are unable to customize lending and the cost of servicing is high. This leads to unmet demand for credit and thus becomes an opportunity for fintechs to take part.

The pain point for small entrepreneurs

The small entrepreneurs have no fixed monthly income. They earn multiple times a month with no guarantee of a fixed base level. A significant number of this group earn in cash and their income is not completely formal or routed through a bank account. However, most of the formal credit products are designed for the salaried with a fixed monthly income. So there is a huge mismatch in the products in the market and the needs of small entrepreneurs. Fintechs have a great opportunity to fill this gap and help India achieve the goal of the $5 trillion economy.

Fintech revolution

Fintech in the lending space in India has evolved in four different phases:

Identity establishment: The Aadhaar project for the formalization of identity was the first step in digitizing the lending business. This could be leveraged by the smaller entrepreneurs as well, as Aadhaar is a commonly available document.

Bank account for everyone: The Pradhan Mantri Jan Dhan Yojana was a drive that was a huge step on financial inclusion, this essentially created a pathway to make credit more accessible. This should lead to a larger sector of people in the financial inclusion drive.

Digitizing money movement: There was a significant effort in creating scalable platforms such as IMPS, UPI and BBPS. Even private players have made digital money available for small entrepreneurs.

Banks and fintech: Many banks are in strategic alliance with fintechs to use platforms such as UPI, GSTN and DigiLocker to innovate and expand the outreach and include the masses.

How is fintech helping resolve the credit woes of MSMEs?

Alternative data processing: Fintech companies access high-quality data from multiple credible sources. For example, GSTN (Goods and Services Tax Network) provides access to a database of 9.2 million MSMEs who have been filing returns every month. This source provides extensive data including the nature of business, cash flow pattern, business growth, etc.

In addition to this, many fintech companies also use big data analysis to assess the digital footprint to establish creditworthiness. This complements well with the necessary documents such as ITR, bank statements especially if the quantum of loan is large.

For smaller loan amounts such as INR 10 lakh, the government has eased the documentation requirement. This has been a boon for many who were earlier not able to access credit easily.

Customized products: Most of the products are tailor-made to match the cash flow pattern of the business. Depending on the requirement the loans may be extended for periods ranging from 7-days, 14-days, 1-month, 3 months, etc.

These typically cater to the working capital requirements for smaller entrepreneurs and the large self-employed sector of the economy. The short-term loans are processed with limited documentation and rigour.

New lending models: Flow-based lending, vertical-based lending and ecosystem-based lending are some of the lending models which leverage the supply chain to extend outreach.

Contactless lending: Fintech lending companies operate with these principles: contactless, paperless, cashless and consent-based. The entire onboarding is done seamlessly by leveraging UIDAI, DigiLocker, UPI, GSTN, etc., for document verification. Video KYC or e-KYC is gaining traction as an identity authentication process and easing out the entire process.

The government initiatives

The National Strategy for Financial Inclusion for India 2019-2024, prepared by the RBI, intended to embrace digital finance completely. As per the SME Chamber of India, the current GDP contribution by MSMEs is 37.54 per cent (FY2020). A target has been set to increase this to 50 per cent by 2024. This is the most significant sector of the economy as it contributes to a large portion. Hence the inclusion of the MSME sector could become a game-changer for the economy.

There are many initiatives that the government has extended to enable the growth of digital lending. For instance, the Government e-Marketplace (GeM) has partnered with the Trade Receivables Discounting System (TReDS) and platform operator Receivables Exchange of India Ltd (RXIL). This will enable PSUs, CPSEs, and other government departments to extend finance to MSMEs.

Acknowledging the strain on MSMEs, particularly during the pandemic, the government launched the Emergency Credit Line Guarantee Scheme (ECLGS), this scheme extended unsecured loans to the extent of INR 3 lakh to MSMEs to weather the distress caused due to lockdown. Technology-enabled its effective disbursement.

India's MSMEs credit gap of $330 billion could see an instant facelift with the recent launch of artificial intelligence (AI)-enabled OCEN (Open Credit Enablement Network). This credit protocol infrastructure by iSPIRT is a platform for interaction between all the stakeholders of the lending business, including, borrowers, lenders, account aggregators, loan services providers etc. Invoice discounting used-case enables MSMEs to receive loans against outstanding implementation. The SAHAY app has been launched under the OCEN initiative to enable MSMEs to access credit on smartphones.

The RBI established the account aggregators framework which is a legal framework for fiduciary entities. This framework enables seamless customer data collection and sharing within the regulated financial fiduciary system with the consent of the customer. This can contribute to faster processing and disbursement.

Future outlook

It is quite apparent that this ecosystem of banks partnering with fintech is growing. The finance ministry is working in close coalition with RBI to reduce the credit gap in the MSME sector. Leveraging on fintech lending, India will be able to achieve the intended GDP target and become a $5 trillion economy as well, provided the MSME sector and the smaller entrepreneurs are included in the gamut.