The COVID-19 pandemic has disrupted the growing world of small and medium-sized enterprises (SMEs). As with so much else in the downturn, the rules for the lending industry supporting these businesses need to be re-written.
SME lending is a vital form of external finance to sustain small businesses and meet their cash flow and investment needs. The traditional debt financing appeared to be ill-suited in the COVID-19 pandemic with challenges like increased financial distress, souring portfolios, bigger waves of defaults, and a lot more.
The exposure of banks and credit unions to small businesses is part of any country’s economic fabric and requires strong interventions in crises, the relief phase, and beyond. In this article, we will summarize small business lending post-COVID-19 and discuss emerging trends.
Impact of COVID-19 on SME Lending Process
According to a report by Dun & Bradsheet, the pandemic has affected over 82% of the small businesses in India. This means SMEs need to work on key areas to work on like:
- Adoption of better technology (35%)
- Marketing support (48%)
- Better credit facility (59%)
While advanced nations cushion struggling businesses with financial aid, cash-strapped developing nations like ours still struggle to access sustained financial measures. To put it into perspective, despite the increasing importance of financiers and SMEs, there is an asymmetry in the long-standing needs of both parties. Here are some challenges financiers and businesses are facing currently:
- Paper-intensive, manual, and cumbersome lending processes
- Lack of online platform with workflow automation
- Inconsistency in loan origination and document management solutions
- Lack of transparency and predictability for borrowers
- Issues in portfolio management
To come out of the economic crunch unscathed, our loan programs and platforms need to unwind the necessary support and innovation for SMEs.
So, how can banks, platforms, and SMEs be in sync to make the lending process seamless? Let us discuss some solutions.
Fresh Approach to Old Problems for SMEs
There are over 63 million micro, small, and medium enterprises in India as of FY20, according to Statista Research Department. These businesses form a key customer segment for banks and financial institutions.
Even though the pandemic stymied the lending industry, it presented an opportunity for financiers to transform end-to-end credit journeys with digitisation, automation, special analytics, and tools.
1. Automation and Cloud Technology
The automation of end-to-end lending processes is essential to drive key strategies, become agile, and deploy credit risk models with no human intervention.
A neutral third-party and consolidated lending platform can provide an automated workflow, coupled with servicing, underwriting features, and well-integrated loan origination. Such a platform can automate the entire lending process for partner banks and Fintech institutions from onboarding, KYC, credit scoring, and more. This could ensure rapid approvals for SMEs and lower origination costs.
Notably, many financiers and platforms are considering scalable cloud-based solutions for faster credit decisions, removal of error-prone manual processes, automatic backing up of loan data, and so on, without additional IT burdens. This is especially ideal for a post-COVID scenario where an otherwise face-to-face lending would pose potential risks and delays.
2. Segmentation Strategy
The goal of a segmentation strategy is to highlight priority service to market segments, according to the banks’ interests. For successful segmentation, the SMEs relationship with the bank, business profile, portfolio analysis, desired products and services are to be considered.
By focusing on key segments, banks can identify and design granular processes that will make perfect sense in crises like the pandemic.
3. Advanced Analytics
The digitisation of SMEs combines information-gathering processes and credit data checks through data-driven analytics that enable the evaluation of different lending scenarios.
Using big data analytics, machine learning (ML) algorithms, and artificial intelligence (AI), platforms can analyse day-to-day sales data to see a business owner’s credit score to offer more loan options, improve underwriting processes, and reduce overall risks.
4. Strong Mobile Support
Digital strong lending providers should be well-equipped with mobile channel abilities for banks’ support staff and SMEs. This comes with a lot of merits such as:
- Easy, seamless digital payment transactions
- Identifying and reporting malicious activities
- Client fund and data protection
- Ensuring the fair treatment of clients
- Prevention of misleading information
- Easy customer identification/verification
In the post-COVID world, mobile phone facilities will bridge the gap and serve as a key distribution channel for cash transfer between financiers and small businesses.
5. Streamlined Rating Process
Considering the relatively low size of SMEs, low capitalisation, absence of dependable credit history/information, and high-risk perceptions, it is essential to have a streamlined credit rating process with risk-adjusted pricing models and prudent decision-making.
Tailoring the loan review and approval process can help with:
- Significant reduction in the bank’s loan processing costs
- More financial inclusion
- Minimisation of the cost of bad debt recovery
- Less risk exposure
If more lending enterprises adopted a proper credit rating strategy, they could present more bankable business propositions and microloans through the digital behaviour or digital footprint of SMEs. A rigorous and regulatory credit analysis is a part of a spate of consolidation for the future of direct SME lending, even during market unease, such as the coronavirus pandemic.
6. Fintech and Bank Partnerships
The ability to lead digital-lending transformations is to foster partnerships between lending platforms, banks, and Fintechs. This aids in presenting new customer offerings and lending approaches, merging individual analytic components with existing bank processes, and scaling customer experience.
Further, long-term partnerships can help:
- Identify potential pain points in credit journeys
- Process lead and approval times efficiently
- Make better-quality risk decisions.
- Lead to more profitability down the road
In a post-pandemic world, such associations can transform the traditional, disjointed lending process through fully digital operations.
To Sum Up
As the pandemic disrupted businesses, it also made the prospect of digitalisation of SMEs more pressing than ever. It is the need of the hour to come together with foolhardy digital solutions and bespoke services in the lending business.
At Finezza, we have tapped into the potential of advanced technologies to increase SMEs’ access to finance and revolutionise the SME lending scenario in India. Get in touch with us today to know all about our product suite.