Disrupting The SME Lending Market With Knowledge And Technology
Although, according to various estimates, as many as 60 million companies that are categorised as MSME are generating employment for almost 80 million people in India, the MSME sector is still battling with unfulfilled credit demand of worth $300 billion.
The Micro, Small and Medium (MSME) sector is one of the key growth drivers of any economy. The sector is also a recognized parameter to assess the health of an economy. Although, according to various estimates, as many as 60 million companies that are categorised as MSME are generating employment for almost 80 million people in India, the MSME sector is still battling with unfulfilled credit demand of worth $300 billion. So, the traditional lending systems which being spearheaded by banks and non-banking financial companies (NBFC) have evidently failed to support system for growth for the MSMEs. Therefore, the need of the hour is to unleash a strong disruption in this under-served segment with the help of technology and knowledge.
However, technology has come to the rescue by offering the lending institutions a broader reach in the MSME and SME segment along with actionable insights.
Companies are increasingly relying on data science, AI, and ML algorithms and non-traditional sources of information like bill payment behaviour, location information, telecom data to underwrite customers especially those that are new to credit and do not have a bureau score. It’s also possible to create statistical score- cards that predict behavioral pattern basis past trends to a high degree of accuracy.
In India, there are multiple government initiatives to increase the data available on a SME customer - Reserve Bank has initiated steps to set up a wide-based digital Public Credit Registry to capture details of all borrowers, including wilful defaulters and the pending legal suits in order to check financial delinquencies. The RBI has
Devising an effective lending strategy for MSMEs is quite challenging, given the fact that most of the MSMEs and SMEs function in an informal economy. So, sourcing data from that segment to understand the cash-flow or capital requirement trend is extremely difficult.
also issued licenses for a new class of non-banking finance companies called Account Aggregators that will act as consent brokers to facilitate access to data.
What’s more, the technology offers easier access to lending for the SMEs as well. Borrowers now do not have to fill in lengthy application forms and submit a file filled with documents to avail credit. They don’t have wait for long for loan approval and disbursements under reduced cycle-time. Technology has helped automate a lot of the credit checks and processes that would traditionally have taken weeks to complete. This has helped customers in Tier 3 and 4 towns now avail credit.
With technology offering the facility of real-time tracking, lenders can now keep a tab on borrowers’ performance anytime and develop early warning systems to diagnose the health of the borrower at any point. Both fin-tech firms and traditional NBFCs, have therefore, now started investing heavily in data infrastructure capable of handling complexity and volume and in developing data science capabilities to augment their value proposition.
The likes of OnDeck, Prosper and LendingClub have developed a robust lending ecosystem for the small business in developed countries banking on non-traditional data. They have fingers firmly on the pulse of the SME businesses. Those players have opened the financial services for the under-served segments. Similar kind of business model can be replicated in India as well in a big way, as opportunities are huge. For traditional lenders, those disruptors are tech barbarians. For small businesses, these are the championing the cause of financial inclusion.