Digital lending and fintechs are changing the SME finance scenario

MSME sector plays a crucial role in driving the economic growth considering the important contribution to GDP, exports and employment. However, financial institutions have underserved SMEs despite their proven growth record and contribution to the economy. There are several reasons for this scenario. The segment is very heterogeneous and, therefore, perceived as high risk. Most of the businesses are family run and prefer funding support from unorganised sources, even though at extremely unfavourable terms. Inadequate credit history and poor book keeping further limits banks’ ability to assess the credibility of such units.

In last few years, there has been a visible focus and encouragement for MSMEs. Various government Schemes and policy measures have been introduced to streamline the flow of credit like CGTMSE, MUDRA and Stand Up India. MUDRA was launched in April 2015 for Micro units and offers 3 loan categories: Shishu (up to 50,000), Kishor (50,000-5 lakh), and Tarun (5-10 lakh). The total loan disbursement combined under the scheme has already reached INR 6 lakh Cr. CGTMSE scheme has been revamped drastically in last two years with some key amendments including limit enhancement to INR 2 Cr, Guarantee coverage enhancement to 75% and inclusion of Retail trade under the Scheme coverage. To further strengthen the access the formal finance channels, Government launched TReDS in 2017 - an electronic platform for MSMEs to auction trade receivables and discount bills raised on large corporates. SME Exchange was launched in 2012 to provide an investor friendly platform for raising capital which can be utilized efficiently for meeting needs of expansion, technology replacement and diversification.

To support Rural MSME growth, National Bank for Agriculture and Rural Development plans to provide around 200,000 point-of-sale machines in 100,000 villages and distribute RuPay cards to over 34 million farmers across India, to enable farmers to undertake cashless transactions. The government’s plan to construct 10 million houses for the rural population with an investment outlay of Rs 81,975 crore for the period from 2016-17 to 2018-19 empower local SMEs to flourish. The government is looking to install Wi-Fi hotspots at more than 1,000 gram panchayats across India, under its ambitious project called Digital Village, in order to provide internet connectivity for mass use, as well as to enable delivery of services like health and education in far-flung areas. The rural regions are already well covered by basic telecommunication services and are now witnessing increasing penetration of computers and smartphones. Taking advantage of these developments, online portals are being viewed as key channels for SMEs trying to enter and establish themselves in the rural market. Many touch points and transaction points by the banks or through banking correspondents are developed giving rural mass a great comfort for doing real-time transactions with ease.

As India’s economy gets bigger and formalised, there are huge opportunities for banks to grow their portfolio in the SME segment. With NBFCs and Small finance banks entering the finance landscape many innovative products are entering the market, making the sector competitive. Banks have realised the importance of customising the risk policies and credit evaluation methods in order to meet the credit needs of this segment. As a consequence, banks are leveraging Technology, Data analytics and Fintech tie-ups to develop customised programmes and enhance their digital reach. Banks are doing their bit to assist MSMEs to adjust to the one nation one tax regime, by investing in capacity building with various trade associations and creating customised credit products to tide over the temporary financial crunch. Earlier this year, at least one bank launched a credit product (offering up to INR 1 crore) to help small businesses avail secured loans based on their GST returns. This product does not require any additional assessment of balance sheet or bank statements. A GST compliant MSME can avail of a loan within 24 hours. Banks are moving to scorecard based funding to make the decision more objective and remove the subjectivity involved in lending to small units. Banks are also developing Behavioural scorecard for auto enhancing limits for good accounts and identifying stress accounts to take proactive remedial actions

Digital lending and fintechs are changing the SME finance scenario in India. Banks are fast moving to adopt the digital ecosystem and automate backend processes to reduce the Decision turnaround time and operational cost involved in processing these small cases. Robotics and Bock chain are some of the technologies that financial institutions are exploring in various domains to digitise the lending process. New age fintechs have brought a revolution in the SME finance scenario in India. The Fintech companies with their innovative techniques and processes like predictive analytics and artificial intelligence are able to provide real time decisioning. Currently Fintechs are giving services like converting scanned financial and bank statements into customised formats for quick decisioning and providing digital platforms to borrowers for easy access of finance. As per research report from BCG, FICCI and IBA, potential of digital lending to MSMEs can increase to 21% of the total lending in next 5 years form current 5 percent. To tap this potential Banks and Fintechs will need to partner and innovate new solutions to reach out to the last mile customer.

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