MSME lending: How data-driven online lending access will empower small businesses
Credit and financing for MSMEs: Narayan urgently needed working capital to handle the booming demand in his restaurant. However, due to the lack of formal credit, traditional lenders could not meet the requirement. It was then that Narayan learned that digital lending platforms offer small unsecured loans to small business owners. He applied online and got a loan within days. Based on his daily transactions, cash flow, and consistent business metrics, he was successful in securing the funds.
This has been the big digital lending achievement in India – empowering small businesses with timely capital. With over 6 crore of SMEs operating in India and over 90% of these extremely underserved SMEs, the gap between supply and demand is estimated at over Rs 7 lakh crore by 2023 and is expected to increase significantly. exponentially over the next decade. Thus, the need of the hour is to ensure the expansion of digital lending services and the empowerment of small business owners.
Why digital lending
Multiple factors have contributed to this growing gap between supply and demand. The lack of warranties and / or digital footprint has often been a problem for small business owners. This is where digital lenders have found resounding success and, by offering faster credit decisions, a seamless customer experience, lower operating costs and a more secure risk profile, digital lenders of the new era have created an innovative business model that is here to stay.
Ease of use: Digital lending startups offer full automation of end-to-end lending services, such as loan origination, information exchange, transaction matching, loan management, record keeping, cash flow management, etc. This drastically reduced the turnaround time of the entire process, resulting in a very convenient and consistent customer experience now.
Efficient and profitable operating model: Digital lenders have significant cost savings. First of all, without the need for physical branches, lenders have lower capital expenditure requirements and are therefore able to scale quickly. Second, digital lenders have lower acquisition cost due to innovative acquisition channels like ecosystem partnerships, social media (Facebook / Instagram), company website, etc. And finally, lower document collection costs. Automated collection mechanisms, such as NACH, have simplified the collection process, resulting in cost savings through optimal allocation of resources. Overall, the new age digital lenders are reducing acquisition and maintenance costs and, as a result, have been able to successfully offer competitive interest rates to the end consumer.
Win-win for traditional lenders: With established risk management practices and diverse customer base, major banks are poised to embrace the digital lending revolution. By leveraging data digitally through strong credit underwriting models, banks can successfully open up other revenue channels and realize significant cost savings.
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Better credit underwriting: Technological advancements such as machine learning models and big data analytics backed by artificial intelligence algorithms promise to create precise underwriting techniques and improve business viability. This allowed loans to be disbursed more quickly to small businesses. In addition, over time, these benefits can also be passed on to customers with lower and very attractive interest rates.
Improved transparency: There have been significant public infrastructure initiatives to enable digital lending. With e-KYC, improved Aadhaar access, creation of Jan Dhan accounts, implementation of GST, etc., millions can be a part of the digital lending growth story. This has improved transparency in the lending ecosystem and will benefit deserving clients in the future.
Future market trends
With the growing presence of online businesses and the growth of lending platforms, the industry will continue to be influenced by data-driven decision making. Revolutionary government initiatives such as the Bharat bill payment system will continue to digitize and successfully formalize Indian SMEs. Few digital loan market trends projected for the future are:
Innovation to transform the lending path for SMEs: New era fintech companies are rapidly gaining market share through their innovative product offerings and partnership-driven operating models. With the big banks embracing digital lending, we can see greater innovation among new age fintech companies, credit bureaus, and third-party service providers, improving the lending-to-customer service journey, solving customer problems, expanding access to credit, etc.
Data and analytics disrupt the loan chain: Indians are increasingly digital savvy, leaving a digital footprint that leads to alternative loan models based on algorithms.
Technological advances: India will continue to see revolutionary innovations in technologies such as biometric authentication, electronic signatures, electronic money orders, etc. This will make the process transparent and facilitate access to credit.
In recent years, digital lending startups have multiplied and have therefore attracted significant capital from renowned investors. They are well positioned for accelerated growth in the years to come. Traditional banks are also redefining their business models, moving to the first online strategy, to further penetrate the massively underserved SME lending market. With the gap between supply and demand for loans set to grow exponentially, the future of digital lending is bright.
Alok Mittal is Managing Director and CEO of Indifi Technologies. The opinions expressed are those of the author.