How digital presence can bolster credit accessibility for SMBs

Small and medium businesses (SMBs) are primary creators of jobs, income, and wealth in India and globally. According to industry reports, SMBs employ more than 50 million people and account for almost a third of the country’s GDP. The total number of SMBs in the country is around 63 million. Yet, they remain underserved compared to large corporations.

Why? By nature, SMBs lack capacity, awareness, and financial literacy. Borrowing funds becomes tough for small businesses because they cannot demonstrate the scale of large corporations, including long-term goals, diversified businesses, and strong financial structures. What adds to them is the lack of adequate transparency and creditworthiness. Therefore, a very small percentage of the sector is financed by the formal banking system, which has led to a huge credit gap. 

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Dismal access to credit

Over 87 percent of 63 million SMBs in India have no access to credit. Unsecured lending takes the centre stage, propped majorly by community finance – comprising family, community members, and unregulated private lenders. That also means the fintech players or alternative lending platforms can grow exponentially. As compared to banks, lending norms from fintechs are somewhat relaxed. For unsecured loans, SMBs don't need to pledge any collateral. 

Over time, new sources of data have emerged. These data sources have amplified the digital footprint of a business and are helping them establish their creditworthiness. One reason for the rise of these alternative data sources is increase in mobile penetration and last-mile connectivity, coupled with reducing smartphone prices. A digital footprint and online behaviour with a simple application form is enough to initiate a loan process. This avoids volumes of paperwork.

According to Omidyar-BCG research, SMB digital lending has the potential to reach Rs 6 lakh crore to Rs 7 lakh crore in annual disbursements by 2023. The factors driving this growth are the pace of digitisation, API-based data to help credit scoring and underwriting, and the increasing number of SMBs receptive to digital lending. 

Today, alternative sources of data such as utility data (telephone bills, electricity bills, gas bills, and so on), social data (social profile, SMS data, call logs, geolocation), and financial and tax data (GST, IT returns) can be leveraged to derive insights about a prospective business’ ability to pay, and the likelihood to default. This coupled with credit bureau ratings helps customers in building a robust profile for themselves, while it helps lenders and the fintech companies operating in ecommerce and digital payments to critically assess a prospective borrower and perform superior risk assessment. 

Digital lending—key trend in 2020

Digital lending through the alternative platforms, therefore, has really caught on. Going forward, increased fintech lending to the SMB sector will be one of the key trends in 2020. According to the Nasscom Lending Report, credit demand from SMBs and consumers presents an addressable opportunity of over $1 trillion by 2023. Furthermore, the fintech companies are uniquely qualified to drive financial inclusion for SMBs by leveraging their access to technology and lending ability at lower costs through automation. 

The gain that SMBs make by accessing fintech support is huge. One, the SMBs get a more formal financial record, which gives them access to broader financial services in the future. Second, they establish a robust digital footprint, much-needed criteria to access finance from fintech lenders. Many fintech players are enabling offline SMBs to create an online identity with their business page as well as innovative customised solutions. There are cascading effects.

As SMBs increase their digital footprint, it will enable lenders (including banks, NBFCs, and other fintech players) to leverage this data and drive the lending market. There will be an emergence of new digital data sources, with the advent of innovative business models. Though, it must be said that the fintech players have already started offering these innovations, one being invoice-based lending. It aims to finance merchants against the amount due from the customer. Point-of-sale transaction-based lending, bank and fintech partnership models, invoice discounting exchanges, marketplaces, captive models, and P2P models are some of the other areas of innovation. Some other innovative models include flexi term loans, flexi interest only loans, equipment loans, working capital loans, and merchant cash advance, which will further help them for their short-term credit necessities. 

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Further, fintechs are offering SMBs fast turnaround time, flexible and competitive rates in terms of interest, minimum documentation, loan ticket size that varies from Rs 50,000 to Rs 50 lakh, credit profiling, and flexibility in terms of repayments. 

Fintechs are making a difference by serving the sector, which is neglected by the big banks and financial institutions — by not only providing them access to affordable finance but also helping them benefit from the digital revolution underway globally. 

It is only wise to encourage the SME sector to tap into this space because they play a vital role in our economy, providing opportunities to our skilled as well as unskilled labour. It is absolutely imperative that we service the credit needs of this sector more than adequately.

(Edited by Evelyn Ratnakumar)

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)