India’s economy has stood firmly in the last few years despite grappling with internal and external hurdles. As of now, the country’s financial ecosystem is evolving at a rapid pace with the widespread adoption of digital lending solutions, driven by notable advancements in financial technology (Fintech), the entry of non-banking financial companies (NBFCs), positive regulatory initiatives, and consistent growth of micro, small and medium enterprises (MSMEs).
India has tremendous economic potential thanks to its 63 million MSMEs, contributing around 30% to its GDP.
While the Indian government continues to roll out numerous schemes to aid their growth, many MSMEs still lack easy access to credit, hindering their development and, in some cases, even resulting in a shutdown.
This article explores the different facets of the modern lending landscape in India and how digital lending solutions can improve financial inclusion and narrow the gaps in India’s financial ecosystem.
The Challenges of the MSME Sector
Traditionally, MSMEs secured loans from state-owned, private, and foreign banks and other financial institutions. Although the Indian government has mandated Scheduled Commercial Banks not to accept collateral security for loans of up to 10 lakhs, the current process has several gaps that do not allow them to evaluate, approve, and disburse loans efficiently.
Some of these challenges include:
- Lack of Robust Risk Assessment Mechanisms: The current infrastructure may fail to provide a comprehensive picture of an SME’s financial health or repayment capacity.
- Inefficient Documentation Process: Although digital documentation and verification processes are evolving, they are not universally applied. This often leads to delays and inefficiencies.
- Reliance on Traditional Data: Banks tend to rely heavily on traditional credit scores or financial histories, which might not give a holistic view of an SME’s potential.
- Lengthy Approval Times: The current system might take longer to evaluate, approve, and disburse loans, especially without collateral assurance.
As a result, MSMEs have struggled to access credit without hurdles from banks due to their informal nature of operations, insufficient financial and cash flow data, etc. This data asymmetry also makes it difficult for financial institutions and banks to evaluate their creditworthiness and financial performance, resulting in slower loan disbursements.
This is where digital lending solutions are bridging these gaps in the Indian financial ecosystem.
How Digital Lending Solutions Are Set to Revolutionize MSME Loans
The Indian financial landscape has long awaited its own ‘paperless, automated, and bank from anywhere’ opportunity, and the arrival of digital lending solutions marks a pivotal point in the industry.
Swift and paperless loan disbursement and enhanced customer experience are key factors driving India’s demand for these agile lending solutions. This trend is likely to gain further momentum in the upcoming years.
Financial regulators and the Government of India are also influential in improving digital economic infrastructure and encouraging financial inclusion.
It is safe to say that digital lending solutions will pave the way for systematic loan origination and credit evaluation.
How Will Digital Lending Solutions Bridge the Gap?
MSMEs created around 120 million jobs in India, asserting their presence as a backbone of the Indian economy. Therefore, the onus is on the government, regulators, and fintech companies to alleviate the sector and provide them with all the tools to thrive.
Here’s how digital lending solutions provide an advantage and facilitate financial inclusion:
1. Faster Credit Approval
Faster credit approval is one of the most notable advantages of digital lending. Additionally, digital lending solutions have shorter turnaround times than traditional lending, especially for advances and small ticket credits, commonly seen among new-to-credit borrowers.
These platforms will likely replace manual form filling with digital data captures and automated loan evaluations powered by advances in the artificial intelligence (AI) and machine learning (ML) realm.
2. Shift from Asset-based Data to Cashflow Data
Data is the new oil, and new-age fintech companies are leveraging data and technology to improve financial accessibility, streamline documentation, and accelerate turnaround times for loan approvals.
Conventional loan processes primarily rely on asset-based rather than cashflow data, creating a significant hurdle for MSMEs and freelancers to secure a loan. Cash flow lending is poised to address this problem. Unlike asset-based lending, where the repayment terms depend on assets and collateral, cashflow lending relies on the projected cashflows of businesses.
Digital lending solutions are gaining immense popularity as they use cash flow data to determine the creditworthiness of individuals and businesses.
3. Digital Lending Solutions are Not Just for MSMEs
Although the onset of digital lending has benefitted MSMEs, retail customers have seen a paradigm shift in their financial journeys. Buy-now-pay-later (BNPL) loans, small personal loans, EMIs, etc., have made credit easily accessible to customers via mobile phones.
Despite the fact that the BNPL trend is still in its infancy, millennials and Gen Zs have embraced it with open arms as they can secure loans at lower interest rates without any credit history compared to traditional lending institutions.
The current market landscape is getting increasingly crowded with digital lending solutions or applications, including Mobikwik, Simpl, LazyPay, MoneyTap, and Slice, giving customers various choices to fulfil their financial needs.
4. Personalised Loans and Communication
Modern finance has gradually shifted toward catering to the customer’s unique requirements. Nearly 67% of Indians depend on personal loans for their funding requirements. Therefore, it is unsurprising to see the one-size-fits-all conventional lending model fade as the demand for personalised lending processes and communication marches upward.
Additionally, today’s customers seek value through tailored services in exchange for their data, compelling lenders to innovate, focus on personalisation, and cater to customers’ unique requirements.
Advancements in data analytics have paved the way for the accurate evaluation of borrowers’ creditworthiness, allowing lenders to provide customised lending solutions.
Wrapping It Up
The arrival of digital lending solutions has opened up new digital lending models, including invoice financing, P2P lending, BNPL loans, digital mortgages, and mobile lending. Today, the demand for credit from MSMEs and individuals provides an addressable opportunity of over USD 1 trillion, indicating a vast untapped market for digital lenders.
Digital platforms will be the focal point of transforming India’s lending landscape and address the gaps in India’s financial ecosystem.
Finezza offers a wide range of financial products that equip lenders to provide tailored lending solutions to drive financial inclusion, growth, and the borrower’s unique requirements, from lending lifecycle management to loan origination systems.
Book a demo today to learn more.
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