Welcome to our 2nd part of the “SME Week Series”, where we bring you a very important topic in the form of SME Lending. It will be extremely useful for all those working in the space of SME, Retail, Manufacturing Unit, Association and other relative sectors to learn innovations and new approaches in running a successful SME.
A major constraint in the growth of the SME sector has been non-availability of easy finance. Not all small and medium enterprises find favor with traditional banks when it comes to lending courtesy lack of experience, absence of collaterals and infrastructure, poor financials, and small ticket size.
In spite of its large size, and the vital role it plays in the country’s economy, the Indian SME sector suffers on account of adequate financial access. Lack of awareness, poor access to banking services, outdated data models, etc, force small businesses to cope with an unhealthy financial environment. As a result, many small businesses either close shop or rely on very expensive and complicated financing, largely from the unorganized lending sector.
The changing scenario
FinTech firms are trying to alter the small business lending market by using technology to streamline the lending process, increase transparency as well as lower the cost of booking loans. For example, the introduction of India Stack should help the FinTech forms to verify Pan, Aadhar, and employment information in a digital fashion.
Another big step will be availability of the Registrar of Company (ROC) date through APIs which can help in verifying the company’s (SMEs) revenue and ownership information.
So, let us check some of the issues addressed by the Indian FinTech companies in the SME lending landscape:
- Credit-worthiness of the borrowers
Traditionally, banks as well as NBFCs relied on the CIBIL scores to judge the creditworthiness of potential borrowers. However, in India, for small businesses who do not have a bank account, analyzing his or her creditworthiness remains an issue.
However, today, FinTech firms are also using Tax data, Aadhar Card, bank statements, and social profiling as well as offering advanced credit scoring to decide the creditworthiness of loan applicants.
- Ease of Access
FinTech firms have simplified the entire business financing process by taking it online. They are a one-stop destination for borrowers looking for financial solutions that match their specific needs. At the same time, small business owners are finding the FinTech platforms very easy to use. Further, the online touch-points give them 24-hour access to the lending products.
- Transparency in lending processes and costs
FinTech firms have a very transparent loan process in place. Business loan applicants can keep track of their application at every stage along with an indicative pricing. Biz2Credit, for example, does not charge any registration or loan application fee and does not charge anything for using the business tools on the website. Lenders are only required to pay a fee if the financing transaction closes. This fee depends on the size of the transaction.
- Non-conventional borrowers
Challenges apart, the Indian SMEs are seeing the brighter side of things. With initiatives such as ‘Make in India’, ‘Digital India’, ‘Start-Up India’ and more, there is optimism in the air.
With FinTech firms offering a wide range of services, Indian SMEs are also adopting a new approach to meet their financial needs. Be it online banking, payment wallets or lending services, SMEs are going online to meet their financial needs, capitalizing on the rise of FinTech firms in India.
Alternate Lending Scenario
When small businesses approach banks and other (conventional) finance firms for a line of credit or OD, they ask for security and collateral to give them funds. Instead, KredX, a startup funded by Manish Kumar, who previously worked with Capital One and HSBC, wants to use these invoices itself as a means of handing out credit. Similarly, Capital Float is helping small merchants with their short-term credit needs, using a customer’s digital footprint as one way of judging credit worthiness. In two years of establishment, Capital Float has disbursed more than Rs 500 crore in loans.
In a country like India where the policy push is more geared towards small and micro enterprise, as the engines of growth, these alternative lending models will support and compliment the SME ecosystem.