‘Digitization and formalization in the industry brought paradigm shift in MSME borrowing pattern’

Credit and Finance for MSMEs: Alternate data bridges traditional and alternative financing methods by providing profound insights into customer behaviour and business projections.

‘Digitization and formalization in the industry brought paradigm shift in MSME borrowing pattern’
The ease introduced by the new-age digital medium is changing borrowing patterns and encouraging digital adoption. (Image: pixabay)

By Arun Poojari

Credit and Finance for MSMEs: Today, the digital ecosystem is signifying its ability to overcome fundamental barriers to the progression of finance for inclusive and sustainable development. New-age banking solutions have evolved from the conventional brick and motor branches. From neobanks, and e-wallets, to buy now pay later (BNPL) and no-cost EMIs, there is a stark transformation across the economy’s spending, lending, and borrowing patterns.  

The government has adopted a cognizant approach to lead the country towards a digital economy. The new wave has bought a paradigm shift in the MSME borrowing pattern as they adapt to the digital ecosystem. 

Traditional and Alternative Financing Methods Joining Hands 

MSMEs primarily struggled to be part of the traditional financing system due to insufficient collateral, low credit scores, and small ticket sizes. Due to these issues, they didn’t qualify for traditional loans and resorted to private lenders, charging much higher interest rates. With losses mounting due to pandemic-driven lockdowns, small businesses started looking for alternative financing options.  

Supply chain financing (SCF) proved an excellent method to address MSMEs’ pain points and provide them access to funding to overcome their working capital woes at competitive interest rates. In the process, typically, the buyers initiate the financing requests, and the sellers receive an upfront payment from banks and NBFCs against their invoices. While SCF existed formally and informally for decades in India, digitization has accelerated its reach and impact.  

The Peer to Peer (P2P) lending model is tremendously successful for alternate financing worldwide and is also gaining traction in India. Borrowers are onboarded and verified on the P2P lending platforms, where financers can see all the details about the borrowers before lending money to them. The bidding process creates an open marketplace for all entities. The Reserve Bank of India (RBI) introduced the Trade Receivables and Discounting System (TReDS) and small finance banks to support small businesses and strengthen the digital ecosystems. 

Alternate Data – The Bridge between Traditional and Alternative Financing Methods 

Digitization has made the SCF process seamless, and the open structure raises the bar for transparency and accountability of all parties to mitigate risks. The ecosystem encourages invoice auction processes that help borrowers and lenders grab the best deal. 

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Since small businesses carry higher risks, conventional lenders must closely monitor repayment patterns and conduct periodic risk assessments. Alternate data bridges traditional and alternative financing methods by providing profound insights into customer behaviour and business projections. 

Digital SCF platforms excel in Artificial Intelligence (AI)-backed risk mitigation techniques, and Machine learning (ML) models offer deeper understanding based on dynamic factors. They are not limited to only credit scores. The models consider time-sensitivity and seasonality factors during risk assessment with the help of alternate data like inventory, GST data, repayment patterns, invoices, etc. 

Lenders identify debtors’ borrowing patterns, repayment potential, and credit worthiness by leveraging cutting-edge technology, data analytics, demographics, and social and financial behaviour. 

Closing Thoughts 

In today’s times, where there are various online payment methods, customers are not restricted to opening accounts with a particular bank or NBFC. Digital payment channels provide innovative solutions and conquer a large customer base. Banks do not own these customers but can offer this segment banking and financial products like loans, insurance, supply chain financing, and much more.  

Also read: ECLGS: 1.19 crore MSMEs, other businesses benefitted till June 2022; Rs 3.48 lakh cr loans sanctioned

The ease introduced by the new-age digital medium is changing borrowing patterns and encouraging digital adoption. Traditional banks, NBFCs, and small finance banks partner with fintechs to provide anchor financing and peer-to-peer (P2P) lending solutions. 

MSMEs are receiving the much-needed handholding from new-age startups. Fintechs have emerged as essential intermediaries to introduce them to the formal credit system, facilitate alternative credit flow to small businesses, and change their borrowing patterns. 

Arun Poojari is the Co-Founder and CEO of Cashinvoice. Views expressed are the author’s own.

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