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“Improving borrower identification, creating credit reporting products crucial for boosting SME financing”

Credit and Finance for MSMEs: The digital switch has enabled the SME sector to automate, accelerate or de-risk payments thereby enhancing the overall experience.

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The volume of credit for SMEs has usually come from commercial banks, credit unions and cooperatives. (Image: pexels)

By Vikas Kumar 

Credit and Finance for MSMEs: The past two years have changed the face of the finance and fintech sector globally. The pandemic accelerated the growth and adoption of digitisation all over the world and that, in a way, impacted the business world. All over the world, SMEs today are a force to reckon with. They are the big wheels turning the ropes of the economy and creating job opportunities along the way. The sector still thirsts for a uniform funding system, which can help it thrive to its full potential. The struggle for consistent funding is real.  

The reason for this discrepancy in funding is because finances in SMEs are complex processes, but low scale. The size of the operation, industry, customer segment and development all contribute to how this sector fares compared to other verticals. The major factors of the sector struggling are the small ticket size of the loans, higher cost of servicing the segment, and constrained accessibility to deliver immovable collateral. These factors restrict more support from financial institutions. 

Changing Face of SMEs 

The digital switch has enabled the SME sector to automate, accelerate or de-risk payments thereby enhancing the overall experience. While the digital transformation has been the biggest revolution in this age and time, it is yet to become an omnipresent system to work with. There are a lot of entities and players in the market who are yet to adopt or move over to the digital side of things. Geographies also determine the complexities of SMEs being unable to acquire the desired funding. Least developed regions like Sub-Saharan Africa, South Asia, and East Asia are more likely to suffer from finance and support which are the most crucial variants of growth. 

The volume of credit for SMEs has usually come from commercial banks, credit unions and cooperatives. While banks have always been hesitant to work alongside SMEs, in the past couple of years, with the right endorsement from the government, banks have been able to position themselves as strategic lenders or partners in the process. 

How can SME Financing be Improved

It has been a difficult journey for the SMEs sector to prove their solvency because of the lack of credit information, which is a key factor. Up until now, traditional institutions like banks have not been very forthcoming in supporting or partnering with this sector, primarily because they do not have fixed assets as collateral. Because SMEs rely heavily on movable assets to access financing, it becomes extremely uncomfortable due to the insolvency frameworks that exist and is insufficient to improve the overall health of the sector. 

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The one crucial way to improve the overall perception of the sector and give it the much need boost is by improving borrower identification, tracking down more sources when it comes to information on borrowing, create credit reporting products tailored for SMEs.

Digital Switch and its Adoption 

The pandemic has changed the very way we transact. The digital up-switch and the lockdowns because of the pandemic reduced major usage of cash and cards, and a move over from physical stores to e-commerce. With the increasing use of customised solutions like QR codes, “tap to pay” and link-based payments, transactions and commerce have eased at their seams and are heightening the overall customer-merchant experience. 

With blanket coverage of basic internet facilities, although not most optimum, it has still enabled businesses to gradually enhance their transactions and interactions with their customers. The current line-up of incentives by the government such as Start-Up India, Make in India, Vocal for Local etc. are significantly helping to boost the overall health of the sector. According to a report by Forbes, there has been a 50 to 70%  increase in internet usage which has, in turn, led to a surge in online businesses. 

Streamlining Process

A key factor that can truly give the required thrust and is going to soon become the norm is automation and cloud technology, by becoming more agile and arranging for credit risk models with no human intervention. Digital lending providers can also help accentuate the transactions related to the sector. This can enable a soundtrack record of clients and their data is protected, easy and seamless digital payments, keep a track of any malicious activities, easy customer identification amongst other benefits of making this switch. Extending financial inclusion, reducing processing costs, long term fintech and bank partnerships and creating bespoke services in the lending businesses are all the steps that are necessary to take in the future or adopt a healthy economic climate. 

Vikas Kumar is the CTO & Co-Founder at LoanTap. Views expressed are the author’s own.

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