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MSME lending: How data-driven access to online loans will empower small businesses

Credit and Finance for MSMEs: With established risk management practices and a diversified customer base leading banks are on course to embrace the digital-lending revolution.

Digital lending startups offer complete automation of end-to-end lending services.

  • By Alok Mittal

Credit and Finance for MSMEs: Narayan was in dire need of working capital funds to manage booming demand at his restaurant. However, due to the lack of formal credit, traditional lenders could not service the requirement. That is when Narayan learnt that digital lending platforms provide small ticket-size unsecured loans to small business owners. He applied online and got a loan within days. Based on his daily transactions, cash flows and consistent business metrics, he managed to get the funds.

This has been the big achievement of digital lending in India – empowering small businesses with timely capital. With over 6 crore SMEs functioning in India and over 90 per cent of these SMEs enormously under-served, the demand-supply gap in is estimated to be over Rs 7 lakh crore by 2023 and is projected to rise exponentially over the coming decade. Thus, the need of the hour is to ensure widening of digital lending services and empowering small business owners.

Why Digital Lending

Multiple factors have contributed towards this rising demand-supply gap. Lack of collateral and/or digital footprint have often posed challenges for small business owners. This is where the digital lenders have found resounding success and, by offering faster credit decisions, seamless customer experience, reduced operating costs, and a more secured risk profile, the new-age digital lenders have created an innovative business model that is here to stay.

Ease-of-use: Digital lending startups offer complete automation of end-to-end lending services, such as loan origination, information exchange, transaction matching, loan servicing, record maintenance, cashflow management, etc. This has massively reduced the turnaround time for the entire process, resulting in much convenient and consistent customer experience now.

Efficient and profitable operating model: Digital lenders have significant cost savings. Firstly, with no need for physical branches, lenders have lower capital expenditure requirements and hence, are suitable to scale quickly. Secondly, digital lenders have a lower cost of acquisition due to innovative acquisition channels such as ecosystem partnerships, social media (Facebook/Instagram), company website, etc. And finally, lower document collection costs. Automated collection mechanisms, such as NACH, have simplified the collection process, thereby enabling cost savings through optimal resource allocation. Overall, new-age digital lenders are driving down acquisition and serviceability costs and hence, have been able to successfully offer competitive interest rates to the end consumer.

Win-win for traditional lenders:  With established risk management practices and a diversified customer base leading banks are on course to embrace the digital-lending revolution. By digitally harnessing data through sound credit underwriting models, banks can successfully open other revenue channels and achieve significant cost savings.

Also read: Govt buying from small businesses surpass annual target; these ministries bought the most from MSMEs

Better credit underwriting: Technological advancements such as machine learning models and big data analytics backed by artificial intelligence algorithms hold promise to create accurate underwriting techniques and driving up business viability. This has helped disburse loans faster to small businesses. Additionally, with time, these benefits can also be passed on to the customers with lower and much attractive interest rates.

Enhanced Transparency: There have been substantial public infrastructure initiatives to enable Digital Lending. With e-KYC, improved Aadhaar access, creation of Jan Dhan accounts, GST implementation, etc., millions can be a part of the digital lending growth story. This has enhanced transparency across the lending eco-system and will benefit deserving customers going forward.

Future market trends

With the growing online presence of businesses and the growth of lending platforms, the industry will continue to be influenced by data-driven decision making. Breakthrough government initiatives such as Bharat Bill Payment System will continue to successfully digitize and formalize India’s SMEs. Few digital lending market trends projected for the future are:

Innovation to transform SME lending journey: New-age fintech businesses are rapidly gaining market share through their innovative product offerings and partnership-led operating models. With leading banks joining digital lending, we can see greater innovation among new-age fintech businesses, credit bureaus, and third-party service providers, thereby improving the lending journey – customer service, addressing customer pain points, expanding credit accessibility, etc.

Data and analytics disrupting the lending chain: Indians are growing digitally savvy, leaving a digital footprint which is driving algorithmic-led alternative lending models.

Technological advancements: India will continue to see breakthrough innovations in technologies such as biometrics enabled authentication, e-signatures, e-mandates, etc. This will make the process seamless, enabling easier access to credit.

Over the last few years, digital lending startups have grown manifold and hence, attracted significant capital from marquee investors. They are well-positioned for accelerated growth in the coming years. Traditional banks are redefining their business models too, by opting for the online first strategy, in order to penetrate further in the massively under-served SME lending market. With lending demand-supply gap projected to rise exponentially, the future of digital lending is bright.

Alok Mittal is MD & CEO at Indifi Technologies. Views expressed are the author’s own.

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