The eco-system of digital lending is now facilitating improved access to funding, based on business fundamentals
There are around 60 million micro, small, and medium size enterprises (MSMEs) operating in India today, contributing significantly to India’s GDP and nation’s employment. But a major barrier to their growth has been the ease of getting credit – today, around 40 per cent of total MSME credit demand is still served by informal sources of credit. This under-served market is a huge potential for MSME lenders and digital players to cater to, with innovative business models tailored specifically to the needs and behaviour of this segment. Across India, the MSME lending landscape is now shifting, with formalisation and digitisation driving the market towards disruption.
Digital lenders, in partnership with traditional lenders, are solving the major challenges in providing credit through managed cost levers at each step of value chain. India’s API infrastructure now enables lenders to easily leverage alternate sources of data for faster and better underwriting. This has been further accelerated with the outbreak of the Covid-19 pandemic, supported by the continuous thrust of measures by the Government on moving the country towards a digital economy. For India to become a $5-trillion economy, lending needs to be done at a massive scale to ensure that MSMEs, the backbone of the Indian economy, can grow. Many examples can be given of how growth of MSMEs can stall without access to the right financing at the right time.
Here’s one example. Mr. Bipin Gada started a western casual-wear garment outlet in Mumbai in the mid-2000s. In 2019, when he was ready to open his second store, he was in dire need of working capital. However, due to lack of formal credit history, he was not able to get a loan from traditional banks. It is then that Bipin learnt that digital lending platforms provide small ticket-size unsecured loans to small business owners like him. Based on his daily transactions over POS machine, he got a business loan of Rs 5 lakhs from NeoGrowth.
Over a decade or more, there are many such inspiring examples across various types of small businesses, where next-gen NBFCs have supported entrepreneurship. Many early stage MSME lenders have shifted from “feet-on-street” approaches to digital-based models that extract greater efficiencies from existing market segments, unaddressed by formal sources of finance.
The trend continues in Covid times but differently.
In May 2020, Ujjwal Parikh, a medical representative in his mid-30s working in Mumbai, lost his job on account of the economic freeze caused by the pandemic. Being a Bachelor of Pharmacy, he decided to open a pharmacy in Ahmedabad, his hometown. We checked his credit history and supported his business. Today, he has a thriving business, and the memories of uncertainty, helplessness and unemployment have faded away.
The above examples illustrate how next-gen NBFCs and fintechs are now catering to small shop owners in key Indian cities. The usual ticket size for loans may vary between Rs 1 lakh and Rs 75 lakh – depending on the entrepreneur’s credit history and the need of the business.
With the lockdowns imposed across the nation, many such customers and their businesses were hit by the pandemic. Many businesses were not digitised or did not operate on any platform or did not offer home delivery of services available. So, the lockdown hit them hard.
Even though digital loans did not help such businesses recoup their losses as such, next-gen NBFCs provided those with timely bridge loans to tide over the working capital requirements. Most of the NBFCs and digital lenders extended loan tenures and offered access to several other services to help digitise their business. Looking back at how digital lenders fared during Covid-induced lockdowns, the entire industry faced massive challenges. However, as things settled into a ‘new normal’, some unique opportunities also emerged around product and business model innovation and around ecosystem collaboration in our business segment.
The multifarious initiatives from the government and regulators – in the form of UPI, Digi Locker, Digital KYC, C-KYC, AePS, BBPS, GSTN, TreDs, etc have helped establish the foundation for flow-based digital lending. Several well-funded start-ups from neo-banking, supply chain technology and bookkeeping segments also aided the digitisation of small businesses. From point-of-sale machines to e-invoicing ledgers to digital bookkeeping apps, next-gen NBFCs and fintech start-ups today have an opportunity to use alternate data to understand the business needs and cash-flow trends of small enterprises and service their lending requirements with solutions at various stages of the business cycle.
Some companies have launched innovative products such as ‘anti-lockdown loans’, ‘Sanjivni loans’ with flexible repayment plans and ‘Digital Lending 2.0’, ‘Insta Loans’, providing contactless loans for affected businesses. Further, multiple payment and investment fintechs have expanded their offerings to include loan solutions such as P2P lending, quick settlement loans and easy loan facility for small businesses to help navigate the situation.
Digital lenders are increasingly shifting towards a fully end-to-end loan approval and disbursement with instant loan approvals. Some of the lenders are processing loan applications by matching the customer against pre-qualified customer profiles. Some are even leveraging IndiaStack – a stack of open APIs that enables lenders to process loans in a presence less, paperless, and cashless manner. Beyond the conventional means of assessing the credit worthiness though credit scores, lenders are now increasingly checking for users’ willingness to pay using artificial intelligence–based algorithms which are now factoring in transactional information and alternate (surrogate) data for cutting down on the turnaround time for final approval and disbursement.
Fintechs are also launching a suite of lending solutions to enable firms digitise and use analytics-driven platforms to offer seamless loans to customers. Some digital lenders have also launched lucky draw coupons to encourage timely repayments to small businesses. All these initiatives will no doubt help accelerate the growth of small businesses.
There has been a slew of encouraging regulatory measures as well with RBI legitimising the video-based customer identification process to verify new customers, and for allowing on-boarding via video KYC authentication. Digital signature and equivalent e-documents have also been allowed by the government to complete the digital KYC process. This will again help small businesses to avail digital loans seamlessly. Even NeoGrowth has gone live with video KYC, along with SBI, YES Bank, IDFC First Bank and many other digital lenders.
As I see it, the entire eco-system of digital lending is now facilitating improved access to funding for excluded segments – especially in relation to small businesses availing of faster and cheaper loans, based on their business fundamentals, and backed by technology. The exponential impact of such lending on lives and livelihoods cannot be emphasized enough. Will such easy funding provide the necessary impetus for first generation entrepreneurs to take the plunge, or invest in growth? I certainly think so.
The author is CEO, NeoGrowth Credit Pvt. Ltd
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