How technology will help revive small businesses impacted by the pandemic
Let’s look at access to lending capital.
By Porush Singh
As the foundation of local economies and communities across the country, rebuilding India’s small businesses will be critical to economic revival this year. Small and medium-sized enterprises (SMEs) in India contribute a third to the national GDP, comprise almost half of exports, and employ a fifth of the country’s workforce; however, only 5 million (less than 10%) were able to operate during the extended lockdown. According to estimates by the Confederation of All India Traders (CAIT), the Covid-19 pandemic caused 20% of SMEs to shut shop, which had a domino effect on another 10% of small businesses dependent on them for business.
As they reopen for business, SMEs are facing a fight for survival. The average SME is absorbing shocks to demand, liquidity and labour, while adapting to new norms of safety and health protection. Many SMEs are unbanked and outside the realm of the formal economy, making distribution of monetary benefits and access to capital a challenge. Nearly 96% are unregistered and approximately 94% are proprietorships.
Against this backdrop, there is need for a sustained approach to help reboot, energise and set SMEs on the path to recovery. In the short term, this would mean supporting SMEs in reopening and restarting their businesses, including helping them go online, meet new safety and health protection norms, and get access to credit to meet working capital requirements.
In the medium term, it would mean empowering them with the tools required to drive more efficiencies and value addition. This would include enabling access to global supply chains and international markets to increase their contribution to exports. For the longer term, the government and industry must support SMEs with continued access to credit and building digital infrastructure to enhance and scale up their business.
The government announced measures to share the immediate burdens faced by SMEs by absorbing their credit risk, deferring their interest payments, and promoting local procurement. It has also recognised that with the pandemic accelerating the shift to the digital economy, SMEs not only need to be revived, but also restructured for resilience. To this end, the government has taken steps to enable SMEs to raise funds publicly and expand into international markets in the medium to long term.
The slow pace of digital adoption is a key reason why Indian SMEs have underperformed relative to their potential. Digitally-enabled SMEs can grow profits up to two times faster than offline SMEs, according to a study by KPMG and Google. They can also employ more people, grow their customer base, and expand into international markets with more ease. Most importantly, SMEs that go digital will be better prepared to deal with changing consumer behaviour triggered by events like the current pandemic and recession as they will be able to continue to service customers as well as ensure supply chain integrity and even expand their area of service.
Let’s look at access to lending capital. Despite revenue streams drying up during the pandemic, SMEs have had to honour fixed costs, like salary and rent payments. This has left many SMEs low on liquidity and working capital, as well as unable to meet the collateral, asset and paperwork obligations to secure short-term credit. If more businesses adopted fintech to manage their payments, they could secure microloans simply through the insights into their credit history derived from their digital behaviour or ‘footprint’.
Day-to-day sales data can be analysed to determine a business owner’s credit score in seconds, using big data analytics, artificial intelligence (AI) and machine learning (ML) algorithms. By collecting and analysing alternative data that is not typically used in credit decisioning, more loans can be offered, underwriting processes can be improved, and overall risk can be reduced. As a result, over half of MSME loan proposal rejections can be avoided with digitisation. While this data cannot completely replace traditional credit data, it can provide unbanked or underbanked groups with a bridge to more traditional forms of capital.
Just last year, an RBI committee recommended that the government develops digital infrastructure to improve the access to and quality of credit for SMEs. Based on the India Stack model of digital authentication and cashless payments, shared infrastructure could help SMEs leapfrog to newer technologies to access credit in emergencies. Cutting-edge technologies built on AI and ML platforms such as liveliness checks, image forensics and facial recognition techniques can verify and onboard merchants without requiring their physical presence or paperwork. Digital solutions like these could help limit the exposure of last-mile farmers, traders and other microentrepreneurs across the country, to ever-increasing shocks to the global economy.
Technology is, in a sense, the backbone of a self-reliant enterprise, as it provides self-owned businesses with the tools and skills to access funding, customers and markets to compete in the new-age economy on a level-playing field. If India’s SMEs are restructured to integrate technology into their business models, they can close the digital gap that has plagued them for generations. They can also truly be economically self-reliant, and no longer depend on big banks or big businesses for financial security. Adoption of global best practices of standardisation, interoperability and safety and security will improve trust in technology as small businesses pave their way into an increasingly interconnected world built on the Internet of Things. There will be a culture of innovation in the country enabling more ‘Made in India’ solutions to be exported to the world and realising the vision of taking small business contribution to exports to a whopping 75%.
The author is division president, South Asia for Mastercard