5 ways fintechs can help MSMEs solve their creditworthiness issues  | The Financial Express

Clipped from: https://www.financialexpress.com/industry/sme/cafe-sme/msme-fin-5-ways-fintechs-can-help-msmes-solve-their-creditworthiness-issues/2671341/

Credit and finance for MSMEs: While there was an expected dip in credit demand during the roughest years of the pandemic, the MSME sector is on its path to recovery, and some industry segments are crossing the pre-pandemic levels.

5 ways fintechs can help MSMEs solve their creditworthiness issues The technology and digital capabilities of fintechs allow them to customize products that meet the cashflow requirements of the MSMEs and extend short-time, small ticket size loans.

By Arun Nayyar 

Credit and finance for MSMEs: Raising capital has been a challenging task for small and medium businesses in India. The last two years have been a reminder of the existing credit gap in India’s MSMEs sector. As per IFC estimates in 2021, the total addressable credit gap in the MSME segment is Rs 25.8 trillion, growing at 37 per cent CAGR. The total addressable market demand by the MSME sector is approximately Rs 37 trillion, of which banks, other institutions, and NBFCs supply about Rs 10.9 trillion. 

While there was an expected dip in credit demand during the roughest years of the pandemic, the MSME sector is on its path to recovery, and some industry segments are crossing the pre-pandemic levels. As per the SIDBI-CIBIL Pulse report released earlier this month, the credit demand by MSMEs has been progressive after the second wave. Current credit demand is about 1.6x times the pre-Covid phase. Commercial credit inquiries have picked up in the last year owing to a recovery in economic and business activity.  

Given this situation, fintech can step in and address the potential lending opportunities for the MSME sector. Here are five ways in which they can help MSMEs resolve their credit problems: 

Tailor-made products: The technology and digital capabilities of fintechs allow them to customize products that meet the cashflow requirements of the MSMEs and extend short-time, small ticket size loans. Such loan products are useful for MSMEs that require constant working capital for growth. Fintechs, with their digital capabilities, can ensure minimal documentation and quick turnaround time for MSME borrowers. Fintechs can offer unique features to their customers such as daily repayment models, which further make availing of credit simpler for them.  

Alongside the credit offerings, few fintechs provide digital services marketplaces to small businesses, where they can connect with multiple digital solutions providers across digital payment, digital delivery or digital discovery platforms. Traditionally, there were blanket financing solutions for small businesses. With fintechs entering the lending ecosystem, financing has been customized in accordance with the nature of the businesses they were lending to. With the advanced usage of emerging technologies such as data analytics and machine learning, fintechs are providing several customized products to their customers as per their working capital needs. 

Subscribe to Financial Express SME newsletter now: Your weekly dose of news, views, and updates from the world of micro, small, and medium enterprises 

Innovative lending models: The integration of digital and analytics is also enabling fintechs with new-age lending models. This can help address the financing needs of MSMEs or industry segments that have been traditionally excluded from the formal financial system due to challenges such as lack of documentation, or credit history. Earlier it took several days for businesses to acquire finance. With digital lenders, they have instant approvals based on scorecards and disbursals within minutes for small ticket loans. Besides these, MSMEs enjoy the benefits of the omnichannel presence of fintechs.  

Paperless and contactless lending: A successful fintech lender’s business is based on the principles of being paperless, contactless, cashless, and transparent. This is possible by adopting the right technology and keeping it simple for MSME borrowers. For example, fintechs are facilitating seamless customer onboarding by using digital-based identification systems already in place, such as GSTN, Aadhaar, UPI, DigiLocker, and other tools, for a quick and hassle-free documentation process, including e-KYC or video-based KYC. The adoption of the Account Aggregator framework will further speed up the paperless journey and reduce the price of lending for MSMEs.  

Assistance to businesses without credit history: Historically, lack of credit history has been a major challenge for MSMEs while applying for loans. To boost financial inclusion, regulatory bodies have been encouraging fintech lenders to extend various financial services to MSMEs with a relatively low-ticket size and little or no credit history. Fintechs use behaviour patterns and analytics to drive formal credit and help such businesses opt out of the informal lending system. Cashflow-based lending is enabling the advancement of loans to MSMEs by analyzing real-time cashflow data in the absence of credit history.  

Co-lending partnerships: With co-lending now a part of the financial ecosystem, the bank-fintech partnerships will help these financial institutions to collaborate and leverage their respective strengths to provide first- and last-mile services to medium and small businesses. The vast reach of banks and fintech-led NBFCs with their digital prowess and innovation, an MSME borrower can procure finance from the remotest corner of the country. Co-lending partnerships can help them get loans as both traditional and digital lenders analyse structured and unstructured data to assess risk and this helps MSMEs get faster loan approvals. 

Also read: ACC battery manufacturing: Banks may be reluctant to lend to smaller players, says NITI Aayog-RMI India report

Interestingly, when MSMEs avail loans from fintech lenders and showcase disciplined and responsible repayment behaviour, they automatically build a healthy credit score that eventually helps them raise higher capital in the future. The rising digital payments adoption by small merchants is paving the way for the successful adoption of digital payments-based lending. Technology advancements in the digital services ecosystem such as account aggregator and OCEN are further bolstering MSME lending. With existing and upcoming digital innovations in the lending space, India’s nearly 8-million-strong MSME sector will continue to be the key driver of the economic and social transition from India@75 to India@100. 

Arun Nayyar is the Whole Time Director and CEO of NeoGrowth Credit. Views expressed are the author’s own. 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s