How digital lending can accelerate small business growth
The digital credit ecosystem now facilitates better access to finance, based on business fundamentals
There are around 60 million Micro, Small and Medium Enterprises (MSMEs) operating in India today, contributing significantly to India’s GDP and the country’s employment. But a major obstacle to their growth has been the ease of obtaining credit – today, around 40 percent of total MSME credit demand is still served by informal sources of credit. This underserved market represents enormous potential for MSME lenders and digital players, with innovative business models tailored specifically to the needs and behavior of this segment. Across India, the MSME lending landscape is changing, with formalization and digitalization disrupting the market.
Digital lenders, in partnership with traditional lenders, solve key lending challenges through cost levers managed at every step of the value chain. India’s API infrastructure now makes it easy for lenders to leverage other data sources for faster and better underwriting. This has accelerated further with the outbreak of the Covid-19 pandemic, supported by the continued push for government measures to move the country forward towards a digital economy. For India to become a $ 5,000 billion economy, loans must be made on a large scale to ensure the growth of MSMEs, the backbone of the Indian economy. Many examples can be given of how MSME growth can stagnate without access to the right finance at the right time.
Here is an example. Mr. Bipin Gada started a western casual clothing store 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 the lack of a formal credit history, he was unable to obtain a loan from traditional banks. It was then that Bipin learned that digital lending platforms offer small unsecured loans to small business owners like him. Based on his daily transactions on the POS machine, he obtained a business loan of Rs 5 lakhs from NeoGrowth.
Over a decade or more, there are many inspiring examples in various types of small businesses, where new generation NBFCs have supported entrepreneurship. Many early-stage MSME lenders have shifted from “street-level” approaches to digital models that extract greater efficiency from existing market segments not addressed by formal funding sources.
The trend continues during the Covid era, but in a different way.
In May 2020, Ujjwal Parikh, a medical representative in his 30s working in Mumbai, lost his job due to the economic freeze caused by the pandemic. After graduating in 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.
The above examples illustrate how NBFCs and next-gen fintechs are now reaching out to small store owners in major Indian cities. The usual ticket size for loans can vary between Rs 1 lakh and Rs 75 lakh – depending on the credit history of the entrepreneur and the needs of the business.
With lockdowns imposed across the country, many customers and their businesses have been affected by the pandemic. Many businesses weren’t digitized or operated on any platform or offered home delivery of the services available. So the confinement hit them hard.
While digital lending has not helped these businesses recover their losses per se, next-generation NBFCs have provided them with timely bridging loans to meet working capital needs. Most NBFCs and digital lenders have extended loan terms and offered access to several other services to help digitize their business. Looking at how digital lenders fared during the Covid-induced lockdowns, the entire industry faced enormous challenges. However, as things settled into a ‘new normal’, some unique opportunities also arose around product and business model innovation and around ecosystem collaboration in our industry.
The multiple initiatives of government and regulators – in the form of UPI, Digi Locker, Digital KYC, C-KYC, AePS, BBPS, GSTN, TreDs, etc. helped lay the foundation for flow-based digital lending. Several well-funded start-ups from neo-banking, supply chain technology and accounting segments have also contributed to the digitization of small businesses. From point-of-sale machines and electronic billing ledgers to digital accounting applications, next-generation NBFCs and fintech start-ups today have the ability to use alternative data to understand business needs and business needs. small business cash flow trends and serve their loan requirements with solutions at various stages of the business cycle.
Some companies have launched innovative products such as “anti-foreclosure loans”, “Sanjivni loans” with flexible repayment plans and “Digital Lending 2.0”, “Insta Loans”, offering contactless loans to affected companies. In addition, several payment and investment fintechs have expanded their offerings to include lending solutions such as P2P loans, quick payout loans, and easy loan facilities for small businesses to help them navigate the market. situation.
Digital lenders are increasingly turning to end-to-end loan approval and disbursement with instant loan approvals. Some of the lenders process loan applications by comparing the customer to pre-qualified customer profiles. Some even use IndiaStack, an open API stack that allows lenders to process loans in a less present, paperless, and cashless way. Beyond conventional means of assessing creditworthiness through credit scores, lenders are now increasingly testing users’ willingness to pay using artificial intelligence-based algorithms that now take into account counts transactional information and alternative (surrogate) data to reduce turnaround time. for final approval and disbursement.
FinTechs are also launching a suite of lending solutions to enable businesses to digitize and use analytics-based platforms to deliver seamless lending to customers. Some digital lenders have also launched raffle coupons to encourage timely repayments for small businesses. All of these initiatives will undoubtedly help accelerate the growth of small businesses.
Many encouraging regulatory steps have also been taken, with RBI legitimizing the process of video customer identification to verify new customers and to enable onboarding via KYC video authentication. Digital signature and equivalent electronic documents have also been authorized by the government to complete the digital KYC process. This will once again help small businesses to benefit from digital loans seamlessly. Even NeoGrowth uploaded the KYC video, along with SBI, YES Bank, IDFC First Bank, and many other digital lenders.
In my opinion, the entire digital lending ecosystem now facilitates better access to finance for excluded segments, especially when it comes to small businesses that benefit from faster and cheaper loans, based on their business fundamentals. and supported by technology. The exponential impact of these loans on lives and livelihoods cannot be overstated. Will such easy financing provide the necessary impetus for first-generation entrepreneurs to take the plunge or invest in growth? I certainly think so.
The author is CEO of NeoGrowth Credit Pvt. Ltd.
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