Micro, Small, and Medium Enterprises sector is the backbone for developing nations like India. In fact, Indian MSMEs are currently working to strengthen their presence across sectors while simultaneously expanding their footprint globally. The consistent progress of the MSME sector is closely related to India’s pursuit of becoming a global economic power.
However, progress and challenges walk hand-in-hand. Today, the MSME is facing plenty of challenges when it comes to access to affordable credit. Thus, MSMEs in India make a large part of the underserved segment when it comes to loans. The MSME credit shortage needs long term fixes so that they enjoy better access to long term finance.
Why Lenders Shy Away from MSMEs Lending?
MSMEs thrive on access to timely and adequate credit, given that it is available at a reasonable cost. The data on MSME credit is captured mainly by RBI from banks and NBFCs. Credit Information Companies (CICs) also receive similar data from banks and NBFCs. As of today, it is fair to conclude that India’s banking system is still small relative to the needs of the MSMEs sector. That is why MSMEs find it challenging to access credit.
Firstly, the risk associated with lending to the MSME sector is very high. RBI data on NPAs in Chart VI indicates the magnitude of risk involved. Lending to MSMEs is associated with hazards like inability to pay due to factors such as delayed buyer payments or supplying to Government entities and other business risks like changes in consumer demand or extraneous events that create a slow-down in the market. Also, MSMEs have little to no equity buffers. Since no risk mitigation mechanisms are available to the MSMEs, even their lenders are risk-prone. Another risk involves their unwillingness to repay a loan. Most lenders fear that lending to MSMEs will inevitably translate into significant credit losses. All lenders lend money with the motive of earning enough to generate returns for their promoters, depositors, investors, etc. High-risk proportions that MSMEs present makes lenders cautious.
Secondly, the cost-to-serve involved is a significant deterrent in MSME lending. Lenders find it hard to assess the creditworthiness of an MSME due to information asymmetry concerning the financial performance of a particular business. Underwriting loans to MSMEs entails a “high-touch” approach in the absence of collaterals, which means the higher operating cost for lenders.
Thirdly, MSMEs’ lending also suffers because of lender coverage. While most of the Indian urban areas have sufficient lender coverage, the credit depth in large parts of the country is reduced. This is why MSMEs have weaker access to formal credit.
Moreover, as a sector, MSME is a highly volatile one due to the prevailing market conditions. Lenders need to extend the time for loan repayment when it comes to supporting MSMEs. However, most lenders remain reluctant to restructure the terms of the loan. Conclusively, lenders hesitate to grant loans to MSMEs due to the lack of transparency, absence of financial discipline, high administrative costs of lending, high-risk perceptions, and lack of collateral. Even the high mortality rates of MSMEs make financial lending institutions doubtful about their survival and growth.
Why Must Lenders Participate in MSME Lending?
Digital lending, as we know, is the anti-dote that can ease the vows of MSME lending for lenders and increase efficiency manifold. Digital lending entails automated underwriting process and risk management, lower operational cost, faster turnaround time, and smoother loan processing, which can ease the process of MSME lending. The platforms for digital lending cleverly leverage technology and techniques like artificial intelligence, machine learning, and big data to empower the loan underwriting process at the lender’s edge. Fintech ensures optimization of payments, an increase in revenue, and cross-selling to achieve profitable returns.
The list of advantages includes high loan approval speed due to significantly shorter turnaround times than traditional loan approval processes. While the process of conventional loan approval used to take weeks or even months for a loan application to move from final approval to disbursement, the turnaround time for an unsecured digital loan can be as quick as one day, with a loan approval occurring almost instantly. Digital lending replaces manual form filing with digital data capture to decrease the chances of errors and streamline the process. With digital lending solutions, lenders can automate the account analysis process.
As we see an increase in internet penetration in tier-3 and four regions, MSME can expand without having to worry about geographical limitations. Furthermore, a sharp rise in smartphone users in every part of the country is contributing to accelerating growth. Lenders are fast adopting mobile-based technologies like Mobility-Analytics-Cloud & Social (M-A-C-S) to help MSME avail loans from a remote area through digital channels.
With the increase in MSME loan demand, embracing digital tech allows lenders to serve all applicants properly because digital lending ensures no in-person visits are required. Moreover, digitally captured other data showcases an accurate portrait of a borrower’s creditworthiness and highlights associated risk for credit underwriting to aid a lender in decision making. Alternate data sources, such as transaction data (e.g., point-of-sale credit card trails) and other surrogate data (e.g., telco, utility payments), provide a wholesome picture to the lenders today.
Digital lending incurs lower expenses, uses state-of-the-art technology, brings down rates of interest, and keeps up with the times. Digital lenders assist legible MSMEs in procuring assets speedily. The digital lending players use data that allows flawless interest classification, credibility assessment, as well as reduces the need for human intervention.
Finezza is a lending lifecycle management tool that aids lenders in digitizing and automate the process of loan approval on the whole, right from origination, evaluation to disbursal. It is a unique software tool that saves time and money as well as enhances the customer service that a lender offers to a borrower. Finezza uses AI and ML algorithms for self-learning that allows it to mimic the understanding of loan evaluation officers and makes error-free judgments about loan evaluation. It uses both client data and leverages other data to serve loans to truly deserving MSMEs, fetching profitable returns for the lender.