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Digital lending and fintechs are changing the SME finance scenario

MSME sector with its significant contribution to GDP, exports and employment continues to play a significant role in nation building. 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 by financial institutions. Most of the businesses are family run and promoters prefer funding support from unorganised sources, at extremely unfavourable terms. Inadequate credit history limits banks’ ability to assess the credibly of such units. Poor bookkeeping and financial planning are a barrier for banks. Fear of low rating and reluctance to dilute equity holding further limit the prospect of having access to formal finance and build a stronger track record for future needs.


Having said that, over the last few years, there has been a lot of focus and encouragement for SMEs and start-ups and it is clear that government is banking upon this sector to drive the economic growth. While MSME units continue to face challenges such as the inability to get skilled manpower, infrastructure related bottlenecks and ability to raise timely finance at economical rates, the government is developing an enabling ecosystem for MSMEs and ensuring that adequate capital and finance channels are available to them. Various policy initiatives like skill development, industry cluster development, the introduction of GST have created a sustainable environment for MSMEs and opened up formal finance channels from commercial banks, small finance banks and NBFCs.


The government has launched SME Exchange to provide an investor-friendly platform to raise capital and start new ventures or to meet expansion requirements. There are some transition-related issues in certain industry segments with migration to the unified tax regime. However, the same are expected to be short-lived and, considering the long-term gains, there is going to be a huge improvement on the macro industry trends. There are lots of businesses that have moved into the formal segment post demonetisation and GST, which will bring benefit to the segment in medium- to long-term. However, micro and small units operating in the informal sector will continue to face credit issues and, therefore, it is important for these units to be better organised and improve on disclosures and compliances for long-term sustainability and growth.


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 fintech firms driving innovation, newer products are entering the market every month, 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 evolving their offerings through innovative products, leveraging analytics and technology to develop customised programmes and partnering with fintechs to 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 Rs 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.


The 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. The major focus for all the companies is now “Bharat” where there is a significant shift in the product portfolio of the companies; more relevant to rural and mass consumers than the urban population. While the focus of banks remains on consumer loans, rural housing, small and micro business lending, the structure of the product has been changed drastically keeping the rural population in mind. With the advent of technological advancements, the turnaround time has also reduced drastically for the delivery of financial services in rural and semi-urban geographies. There is also a huge shift in terms of customers – banks are now tapping entire household financial requirements while offering products for the rural market.


As per the economic survey for 2018, MSME advances stood at 4.4 trillion which is 17 per cent of the total credit outstanding. There is large unmet credit demand in this segment, which was estimated to be about Rs. 25 trillion. RBI’s Annual Report 2017-18 mentions gross non-performing assets (GNPAs) at 12.1 per cent as on March 2018. Public sector banks have a market share of ~50 per cent on total lending towards MSME lending. Eleven big public sector banks are under the PCA framework of RBI due to higher NPAs and have lending restrictions. This has adversely impacted the credit flow to MSMEs. Many of the MSMEs are directly and indirectly related to large corporates either on the supply side or on the distribution side. Some of the large corporates are under stress which has further added to the woes of these units. To ensure that SME assets don’t become NPAs bank follow the revival and rehabilitation policy mandated by RBI for all MSME customers. Under the policy, all MSME client which are SMA2 has to be put under a four-member standing committee for arriving at the Corrective Action Plan (CAP) which shall include the options of rectification, restructuring or recovery. The committee includes two independent external experts. The revival policy ensures that proactive actions are taken for MSME customers that are under stress so that they do not turn into NPA. Ever since the two major reforms – demonetisation and GST – have been announced, government and RBI has initiated various policy measures for MSME units. One of the major reforms being the additional dispensation on NPA classification given to banks for MSME units under stress.


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 reap the short- and long-term benefits. The end-to-end digitisation will not only assist banks in reducing the turnaround time for decisions but will also reduce the processing cost involved in lending to these units. This shall not only provide timely access to funds but also lower the pricing of these loans. Robotics, block chain, artificial intelligence, big data, analytics are some of the initiatives that financial institutions are exploring. New age fintechs have brought a revolution in the SME finance scenario in India. The fintech companies with their innovation and new age techniques like predictive analytics and artificial intelligence are able to help in real time decisions, thus reaching out to the last mile customer. These technologies are allowing banks to move from traditional funding methods based on collaterals to advanced cash flow lending. Some of the reputed fintechs are providing services like converting scanned financial bank statements into customised formats for quick decision making and providing digital platforms to borrowers for easy access to finance. Banks and fintechs will have to work jointly to innovate customised digital offerings while also ensuring that maximum MSME are able to avail the benefits of formal lending channel.