‘Fintech can bridge MSME credit gap with digital data to assist risk analysis, cash flow-based lending’

March 30, 2021 3:49 PM

Credit and Finance for MSMEs: Access to reliable data in an “easy to access and analyse” digital format is at the center of this business model that will unlock credit supply to the MSME sector.

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  • By Shilpa Mankar Ahluwalia

Credit and Finance for MSMEs: Access to affordable formal credit has always been a challenge for the MSME sector in India. Disruptions to businesses triggered by COVID-19 and the tightening of liquidity made this credit problem even more acute. Digital lending fintech platforms have the potential to significantly bridge this funding gap and have already changed the way the MSME sector accesses credit. There are two key reasons for this, first, fintech lending platforms have much lower customer acquisition costs than the banks and more traditional lending institutions and are able to service target niche customer segments that need small value loans. Second, fintech lenders leverage their use of technology to develop alternative forms of credit risk analysis using tools such as artificial intelligence and big data analytics which allow them to understand and price credit risk effectively and quickly.

Access to reliable data in an “easy to access and analyse” digital format is at the center of this business model that will unlock credit supply to the MSME sector. Sophisticated data analytic tools also allow fintech lenders to customize credit products to the specific needs of a particular MSME borrower.

The account aggregator framework, once operationalized will play a key role in giving fintech lenders access to reliable financial data sets of a potential MSME borrower. Financial data currently resides with multiple regulated entities and it can be cumbersome for a borrower to collect this data, aggregate, and share it with banks and financial institutions, as is required to access credit. An account aggregator acts as the intermediary that manages and controls data flow and solves this precise problem. Data of a borrower linked to bank accounts can now, under the RBI account aggregator framework be “pulled” from a financial information provider and “pushed” to a financial information user (in this case, the fintech lender). The fintech lending platform will then analyze the aggregated data to determine the kinds of credit products that the borrower is eligible for.

Another important data point that gives fintech digital lenders an understanding of the business and cash flow cycles of a potential MSME borrower is GST-linked data. Today, GST data is standardized, available digitally, and reliable, which has created the opportunity for cash flow-based lending products to the MSME sector with very low customer acquisition and loan processing costs. This has the ability to transform the way the MSME sector accesses credit.

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The ability to create a complete end-to-end digital customer journey has been an important aspect of the customer onboarding strategy for fintech digital lending platforms not just to be able to offer a seamless customer experience but also to manage costs.

KYC processes mandating physical verification of documents was a problem, but the RBI digital KYC and video KYC regulatory frameworks have allowed fintech lending platforms to develop non-face-to-face customer onboarding tools which have significantly simplified customer acquisition procedures. The next step will be for the regulations to allow lenders to rely completely on the KYC done by another financial institution, such that so long as all loan disbursals and collections are done via a fully compliant KYC bank account, the lending bank or fintech platform need not undertake its own separate KYC of the borrower. This will greatly help in creating newer distribution channels for the small value loans to MSME borrowers.

The ability of fintech lending platforms to bridge the MSME credit gap is also to a large part dependent on sources of capital available to these lending platforms. Most digital lending platforms have traditionally relied on a mix of equity and debt capital and also explored lending models in partnership with banks. fintech lenders are also now looking at post loan origination sources of capital such as securitization and direct assignment transactions to improve liquidity.

To summarize, a big part of the MSME credit gap can be solved by fintech lending platforms if they are able to access reliable digital data sets that can assist with credit risk analysis and cash flow-based lending, the regulatory framework supports a low-cost KYC and customer onboarding process and if these platforms themselves are able to tap into a wider set of channels for their own sources of capital.

Shilpa Mankar Ahluwalia is Partner and FinTech Practice Head  at Shardul Amarchand Mangaldas. Views expressed are the author’s own.

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