By Alok Mittal
Today, fintech has become synonymous with financial inclusion in India. Across the country, people who do not have their own bank accounts are still seamlessly conducting digital transactions. Businesses in cash-dependent tier-2 and tier-3 markets, from kirana stores to neighbourhood panwallas, are receiving money digitally through QR codes and payment apps.
The most significant impact of India’s fintech revolution, however, has been on the MSME lending landscape. With the emergence of innovative alternative lending platforms, smaller enterprises with no financial records or credit history are now finally getting some much-deserved access to credit. The use of new-age technologies and digital tools such as AI, machine learning, and data analytics is helping fintech companies extend customised working capital solutions to the sector, which currently faces a credit deficit of around Rs 16 lakh crore.
And, in the new decade with several new developments in the pipeline, MSME lending in India is expected to evolve further. This high-potential, high-value space will continue to grow and drive greater financial inclusion across the country in 2020 and beyond. Let’s look at some of the factors that will impact this upward trajectory.
MSME lending in the 2020s: Technology and data combine to deliver unparalleled benefits
One of the biggest change drivers for the MSME lending ecosystem in 2020 will be the improved access to high-quality data from multiple credible sources. Take, for instance, the Goods and Services Tax Network (GSTN), which currently has a registered base of more than 9.2 million MSMEs regularly filing monthly returns every month. The GSTN data is verified through the matching concept and provides a deeper and more expansive overview of the nature of the business, thus complementing the conventional financial data.
With more accurate verification and validation of transactional information enabling stronger underwriting processes, this will improve the efficacy and coverage of newer fintech lending models such as flow-based lending, vertical-based lending, and ecosystem-based lending. As a result, more creditworthy Indian businesses across segments will have access to innovative lending solutions such as invoice discounting, purchase order financing, and working capital financing that are currently offered by leading fintech platforms.
Certain developments already underway indicate that this data-driven transformation will come to pass sooner, rather than later. The government has recently introduced ‘PSB Loans in 59 Minutes’, which makes extensive use of the GSTN data to facilitate business loans and has also proposed an e-invoicing system to cater to the capital requirements in the MSME sector.
The data focus in the fintech sector is also expected to move from volume to relevance. As with the GSTN data, fintech companies will focus on sourcing richer data elements that can help them create sustained competitive advantage and extend better lending solutions to their customers.
As a result of this shift, more innovative lending models will emerge even as existing ones find greater market traction. Take, for instance, supply chain financing that leverage transactional flows in upstream and downstream supply chains to make credit available at the point of need. Fintech companies can leverage an anchor near the centre of the supply chain to extend cash discounting and direct purchase credit lines to the downstream distributor network. Similarly, upstream suppliers can fulfil their working capital requirements with collateral-free loans through solutions such as invoice discounting. This will not only help reduce the capital burden on businesses within the supply chain but will also address one of the biggest pain points in the MSME ecosystem – the lack of working capital caused by unpaid invoices that can take anywhere between 30 to 90 days to clear.
NBFC account aggregators (NBFC-AA) and digital services
While the aforementioned factors will play a key part in driving the growth of MSME lending, other developments – such as the introduction of e-mandate services and the possible introduction of NBFC account aggregators (NBFC-AA) – are also quite encouraging. E-mandate services, for instance, will allow fintech companies to digitise that part of the digital lending value chain that yet remains to be transformed by the growing tech integration: post-approval documentation.
To have the loan amount disbursed to them, borrowers still have to physically countersign paper-based NACH forms. This dependence on physical documentation adds to the time taken to complete the capital disbursal, while also adding to the financial costs of completing the lending process. More importantly, issues such as signature mismatch can cause significant delays and add to the operational challenges faced by MSMEs. Digital e-NACH services being adopted by leading fintech companies in India are addressing these concerns by enabling borrowers and lenders to digitally countersign the approval documents. This, on the one hand, makes the online lending process swifter, more streamlined, and seamless for borrowers while, on the other, allows fintech lending platforms to benefit from more efficient and cost-efficient operations.
Similarly, the rise of NBFC-AAs is expected to eliminate the challenges faced in the collation of financial data. Fintech companies often lose leads because borrowers find the process of extracting and uploading their financial statements across different bank accounts to be too much of a hassle. These NBFC-AAs will manage the process of extracting financial data through API integrations, with the end-user’s consent and in full compliance with existing data regulations and policies.
This will allow customers to conveniently push through their loan applications by simply consenting to the use of their financial information. Fintech companies, in turn, will be able to source data in a more structured and convenient format for better lead conversion, as well as more streamlined underwriting and risk assessment. As a result, more MSMEs across India will have access to curated financing options to grow and sustain their businesses. The exchange of data that was previously stored in isolated silos will additionally allow fintech ventures and traditional BFSI companies to explore unique partnership opportunities that will improve the capital availability in the market.
While 2019 was a stellar year for fintech companies, particularly those operating in the MSME lending space, the coming year is expected to be even better in terms of growth opportunities. The Union Minister for MSME, Nitin Gadkari, has outlined a plan to increase the sector’s GDP contribution to 50% from the current 29%, as India works towards the ambitious $5-trillion target that it has set for its economy. The continued evolution of the MSME lending landscape has the potential to turn this dream into reality.
( The writer is CEO & Founder, Indifi Technologies.)