By Mayur Modi
Credit and Finance for MSMEs:
Be it individuals or institutions, everyone goes through a financial crisis at some time or the other. Going by WBG-Intellecap estimates in 2017, MSMEs’ addressable credit demand in India was pegged at INR 36.7 trillion. At INR 10.9 trillion, however, the overall supply from formal lenders remains inadequate in meeting this demand.
As per demand and supply estimates, banks and other traditional financial players are unable to meet a whopping credit gap of INR 25.8 trillion. One of the biggest barriers impacting supply is the lack of credit history and proper business documentation.
Benefitting the Unbanked and Underserved
In such a scenario, avenues of expansion are being created for digital lending players and new-age NBFCs. Since banks and other traditional lenders are wary of serving those without a proper credit history, digital lending platforms have been eagerly stepping in to fill the gap through innovative business model and deployment of technology.
Despite the Government of India’s best efforts to ensure financial services reach all people across the country through the Pradhan Mantri Jan Dhan Yojana, Pradhan Mantri MUDRA Yojana and other schemes, millions of individuals and businesses continue to remain outside the purview of the formal banking system. One of the biggest barriers to credit uptake has been the reluctance of traditional lenders to advance loans for those with no credit history or low credit scores. Irrespective of whether a loan applicant was salaried or self-employed, there was no way they could avail of loans during a financial emergency. Consequently, they could only meet their needs by borrowing funds from family and friends or became prey of loan sharks.
But new-age fintech firms are now deploying tech tools and techniques to offer their services to the unbanked and underserved cohorts, resolving financial problems via seamless, speedy, affordable and convenient lending options. Their efforts have seen the lending system evolve from a purely physical domain into a hybrid banking model that comprises both digital and conventional modes and making use of both financial and alternative non-financial data points for credit underwriting.
In this process, digital lending companies are benefitting from tailwinds that accelerated the adoption of digital deals by the masses, overcoming their initial reluctance. The push toward digital gained momentum through Demonetisation, the introduction of GST and social distancing norms enforced during the nationwide lockdown after the pandemic struck in March 2020.
All these factors created a conducive environment for new age lenders to extend their reach across India. As a result, India’s digital lending domain is slated to rise to $350 billion in 2023 from $110 billion in 2019. One of the biggest offerings of digital lenders is the provision of instant personal loans, which has made access to credit easier, faster and hassle-free by overcoming the hurdles borrowers face with banks and other conventional lenders. Be it small-ticket loans or big-ticket financing, fintech firms are making all of this a reality for cash-strapped individuals and enterprises.
Array of Advantages with Digital Tools
Right from receiving the loan application to the due diligence, processing, approval and disbursal of the amount, digital tools have transformed the process of procuring emergency finance. The first tool that helps in this seamless process is the use of alternative means to undertake due diligence by leveraging non-conventional credit data. For example, purchasing patterns, social media mining, data from digital transactions such as NEFT, IMPS, RTGS and UPI, past credit history, if any, etc. all throw light on the creditworthiness of the prospective borrowers. The digital risk assessment techniques eliminate the need for physical documentation, thereby simplifying and streamlining the underwriting process.
Once the loans are disbursed, advanced tech tools that use artificial intelligence, machine learning and big data analytics help in improving collection levels and minimising delinquency. For instance, periodic email and SMS reminders make sure that customers maintain sufficient balance in their bank accounts before the repayment due date. Therefore, EMI bounce rates are minimal. Operational costs of new age lenders are also minimised by the use of third-party data and analysis of the digital trail – an area in which traditional lenders incur extra expenses.
The grant of such loans to those without any credit history not only brings immediate relief during a financial crisis but also helps them build their credit history as first-time borrowers. Thanks to this, such people then become eligible even for long-term, big-ticket loans in future.
Besides, digital lenders don’t directly compete with banks but rather complement them by granting credit to those who are ineligible for loans from legacy lenders. This is especially true in the case of small-ticket, short tenure loans that banks don’t generally offer.
Financing needs could be for business or personal emergencies. Whatever the case, instant loans can be used for various purposes such as working capital needs of business or for personal purposes: renovating one’s home, buying a vehicle, educational expenses, purchasing property, etc. Particularly in the case of medical emergencies or other crisis where funds are required at short notice, instant personal loans can make a big difference since these could be sanctioned and disbursed within hours of a request being submitted.
By providing instant loan approvals with flexible tenures through fully digital transactions in crisis and non-crisis situations, digital lenders are truly enabling the goal of faster financial inclusion across India.
Mayur Modi is the co-founder and co-CEO of Moneyboxx. Views expressed are the author’s own.