Fintech - Disrupting The Lending Status Quo For MSMEs

In today’s hyperconnected world, where everything is digitised - from ordering clothes to groceries and loans - Fintech has come a long way in establishing itself as the precursor of the monetary space.  The formal financial system has underserved the SME sector that forms the crux of the Indian economy, and, as a result, only 3% of SMEs can avail loan through the traditional modes. SMEs, for long, have been facing this issue due to the lack of credit rating, sufficient collateral, lack of documentation, and more. Moreover, the sales and profit margin of small businesses are highly vulnerable due to several factors like seasonality, labour cost, pending payments, natural disaster, unexpected expenses, and several other factors that result in uneven cash flow.  Since most of these small businesses lack sufficient documentation, getting the required monetary support becomes a challenging task. A report by the Ministry of Micro, Small, and Medium Enterprises revealed that about 51 million MSMEs are operating in India that contributes to around 45% of the manufacturing output in the economy. Additionally, research conducted by the International Finance Corporation (IFC) suggests that the current capital shortage in the MSME sector is approximately $2 trillion. The stark number not only validates that the MSME sector, by and large, has been credit deficit but also questions their very survival. This is precisely where Fintech emerges as the growth enabler of the MSME sector.  The advent of technology is slowly transforming the lending scenario, thanks to the rising number of fintech players with digital-centric solutions, altering the status quo of MSME lending.  

The Emergence Of Fintech 

The digital lending arena in the nation is swirling with a flock of fintech organisations, or P2P lenders (as classified by the Reserve Bank of India) plunging into the segment focusing on the unmet demands from the MSMEs for credit. Today, fintech players have transformed as an MSME growth catalyst, serving the underbanked and unbanked organisations with its innovative lending solutions. The rise of fintech players in the Indian market has brought a new wave of revolution in the lending space. This new form of alternative lending has been instrumental in driving financial inclusion and the growth and betterment of the MSME sector.  These Fintech companies use best-of-the-breed technology coupled with innovative techniques and methodologies like cloud computing, predictive analytics, and artificial intelligence to prepare credit ratings for MSMEs and make credit available to all strata of the community. Since these companies employ online documentation, it helps significantly lessen the Turnaround Time for loan approval.   Fintech players harness innovative business models to bridge the funding gap in the credit-deficit MSME sector and hence have emerged as a significant growth catalyst, fortifying small businesses. These companies have thus turned into a one-stop-shop for addressing the financial needs of the MSME community. 

Non-Conventional Data Sources For Credit Underwriting

The last two years have been a witness to an increased focus and encouragement for the MSME community and startups, making it clear that the Government is banking upon the sector to drive economic growth. This is validated by the launch of several schemes and policies by the Government to streamline access to data like GST, KYC, Udyog Adhaar, and more.  Fintechs have added a considerable measure of value and created a tremendous innovation over the past couple of years. Moreover, with the implementation of GST considered as a landmark step towards the betterment of MSMEs, as it provides transparent business information on a real-time basis.  Since most of the data are now available online, Fintech players can now mine the existing data sources such as bank statements and credit bureau records to generate rich insights, all the while leveraging new data sources to enable efficient risk assessment of MSMEs. 

The Bottomline

With an increasing number of NBFCs and small finance banks plunging into the financial landscape, there have been a plethora of innovative products swarming the market, making the sector more and more competitive. Traditional financial institutions are also jumping into the bandwagon by introducing MSME friendly policies to meet the credit needs of the industry. As a result, they are now integrating innovative technology, data analytics, and partnering with Fintech organisations to frame tailor-made programs and enhance their reach. Although NBFCs and banks are taking strides to improve the current MSME loan prerequisites, there is still a gap in between demand and supply of credit.