How Disruptive FinTechs are Solving MSME Credit Crunch? –An Indian Perspective
Snapshot of the current Indian MSME sector
- 8 million enterprises
- Employs approx. 124 million people
- 14 % are women-led enterprises
- 59.48% of total establishments were found in rural areas
- Accounts for 31% of India’s GDP
- Accounts for 45% of exports
- Biggest Challenge: Lack of adequate and timely access to finance
Source: MSME Annual Report
Source: MSME Annual report
Traditional Financial institutions remain wary from providing loans because
- Small ticket size
- Higher cost of servicing the sector
- Limited ability of MSMEs to provide collateral
The overall demand for both debt and equity finance by MSMEs is estimated to be INR 87.7 trillion (USD 1.4 trillion), which comprises INR 69.3 trillion (USD 1.1 trillion) of debt demand and INR 18.4 trillion (USD 283 billion) of equity demand.
This need for technology disruption in formal debt financing has been underscored by a credit gap – estimated at USD230 billion in 2017 – coupled with demand and supply-side issues in financing for MSMEs.
The Role of Technology in Driving Digital Finance
According to PWC, MSME banking is likely to be the fourth-largest sector to be “disrupted” by Fintech in the next five years after consumer banking, payments, and investment/ wealth management.
Fintech companies are offering solutions that can substantially improve efficiencies at every step of the lending process. Fintech models can provide end-to-end solutions for the lending value chain or “full stack lending models” such as peer-to-peer (P2P) lending, marketplace lending, crowdfunding, invoice based financing and so forth. Currently, a number of Fintech companies are providing for small-ticket loans focused on MSMEs that have limited credit history and need formal funding.
- Vistaar Finance – a Bangalore based company has created online sector-specific credit rating templates for the MSM businesses it serves. With a loan portfolio of INR 1,270 Crores, it has digital branch option for those businesses who wish to transact online and have access to technology to do so. Vistaar Finance has developed a template to list all categories of products as well as the margins a store makes on each product even with such basic information. Its credit managers evaluate customers based on this information. Vistaar has also tied up with Indian e-commerce platform in the B2B segment, mjunction in order to serve its small purchasers on the e-auction platform. The partnership is designed to augment the services of mjunction to its customers and also provide a healthy mix of portfolio for Vistaar in the MSME segment.
- Another Pune-based Kudos Finance that provides microfinance services to small businesses carried applicant sourcing, credit assessment and disbursal offline since customers do not have access to smart phones and need in-person communication channels with lenders, the company uses stores its credit data and documents, making communication within the NBFC more efficient, ensuring disbursal within 5-7 days. Before approving loans Kudos perform proprietary method of assessment by following robust underwriting process and also performs last mile customer verification to avoid frauds. Kudos has been continuously working on adopting technology to automate processes and has implemented systems to improve customer on boarding experience, decision making quality and reduce turn-around time of a transaction. Kudos Finance & Investments is actively using 28 technologies for its website. These include Viewport Meta, IPhone / Mobile Compatible, and SPF.
- NeoGrowth is a good example of a pioneer lender leveraging deep data insight and analytics to drive customer sourcing, underwriting, and monitoring, supported through a best-in-class tech stack. NeoGrowth serves MSME retailers, applying smart analytics on their bank account and financial data, along with insights from the retailer point-of-sale (credit card) system to predict customer patterns and behavior. The company also offers flexible and innovative repayment options to customers which are linked to their actual business revenues and performance. NeoGrowth assesses a borrower basis the digital spends happening on POS machines at his outlet. The proprietary technology platform of NeoGrowth, helps in analytical underwriting around the digital spends data and other alternate data. With its tech enabled underwriting it provides tailor made loans to various merchants as per their industry segments ranging from food& beverage, apparel, Salon, petrol pumps, automobile dealers etc. NeoGrowth’s card statement based scoring algorithms provide a better assessment of credit – worthiness of small businesses as compared to traditional balance sheet based lending.
How are incumbents using Fintech solutions for digital lending?
The advent of digital lending has addressed some of the major customer on-boarding hurdles faced by loan seekers in India. Kotak Mahindra Bank which launched its flagship Fintech product Kotak 811 to offer instant credit card issuance states that there was an 85% customer opt-in for the free credit score assessment.
In addition to retail credit offerings to individuals, lending startups can play a vital role in formalising credit delivery to MSME, where 40% of the borrowing is still being carried out through informal channels and cash transactions.
Bengaluru-based Shubh Loans has started the process to apply for an NBFC licence. The platform, founded by former banker Monish Anand and Goldman Sachs executive Rahul Sekar, is targeting the financially underserved segment. Shubh Loans has reached a monthly disbursal rate of INR 15 crore and is doing around 5,000 loans per month.
Another tech startup Moneytap had begun by offering a credit line to consumers in partnership with private sector lender RBL Bank. The Moneytap app was launched in 2015 with RBL Bank, that lets lenders procure a sum between INR 3,000 to INR 5 lakh at a lower interest rate than incumbents. Once the amount has been payed-off, the app let its lender apply for more sum.
The future of Financial Services industry is bound to be customer-centric, technologically up-to-date( driven by the world of digital) and supportive of internal and external innovation efforts.
According to PWC, more than 90 percent of MSME digital borrowers in the next five years will be first-timers. Consequently, there will be more drop-offs as MSMEs become frustrated or confused by the journey and abandon their efforts. Roughly 30 percent of MSME borrowers expressed increased comfort with digital lending when assisted. It is critical for lenders to support these customers through call centres and chat messengers.
Emerging technologies companies need to take a new approach and ease customer journey. Moreover, partnering with digital enabler companies to put together skills and learnings can help them to make use of modern cloud-based or open-source systems utilised by FinTech companies, and they should work together to integrate new technologies in already existing architecture. Successful partnerships between Fintechs and traditional financial institutions could be a game changer for MSME lending in India:
- Use Fintech solutions to improve lending process and outreach
- Finance MSMEs (co-lending, on-lending, guarantee mechanisms etc.)
- Leverage together Fintech solutions for outreach to MSMEs (for instance through P2P lending and marketplace lending)
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