India is a land of extensive opportunities and a home to 6.3 crore MSMEs; a significant chunk of the population and needless to say, an essential part of the economy. These MSMEs indulge in several kinds of businesses and yet they all face a similar challenge- access to capital.
Formerly, banks were a traditional source of availing credit which was not only time-consuming but also involved long processes that did not necessarily provide the outcome businesses desired. However, a new dawn of innovation in the financial sector has transformed how MSMEs are served; promising a more inclusive tomorrow. Customer-centric credit modules have lessened the friction that has plagued MSMEs for a long time now. Using technology, upstarts have made it easier for small businesses to choose their creditor, avail credit, improve cash flow, make informed investment decisions, etc.
As per the data revealed by the economic survey, a majority of these MSMEs are sole proprietorships, hence, they are limited in their managerial, marketing and operational skills. Apart from the rules and regulations of the banking industry, which require certain hygiene parameters to be met in determining creditworthiness and the costs incurred in servicing MSMEs, it does not make a viable business case. With technology, these challenges are being addressed with complete analysis and business-centric products.
Interestingly, as per data, it is estimated that more than 3.3 million members have registered on Alibaba.com- an e-commerce marketplace, which indicates that with the help of technology and sufficient access to credit, small businesses are going ‘glocal’ from local.
Moreover, this shift to ‘glocal’ has also given rise to online transactions. These transactions are recorded and are used for analysis to serve these small businesses better with products and services most suited to them. This has opened new avenues for small businesses and lenders, respectively. While it helps small businesses in availing of formal finances, it helps lenders widen their reach in the market.
Being said that, the primary customer base for lenders should not be MSMEs selling goods online. Principals or processes of lending digitally or using technology prowess can be extended to typical small business owners operating in the conventional format as well. Although the intervention of technology is to ensure quick and paperless lending, considering India’s rural population, conventional borrowers cannot be neglected.
The key processes to be addressed for the same will be assessing the funding gap & credit requirement, capacity to repay (business fundamentals) and willingness to repay (identify and credit history). The critical success factors for digital lending in India will be transparency, turnaround time (TAT), process control and operational efficiency.
The Pandemic Challenge for Small Business Owners
Digital lending to MSMEs was poised to grow between INR 6 and 7 lakh crores in annual disbursement by 2023, i.e., pre-pandemic, as revealed by the Omidyar Network India. The pandemic brought to the fore the limitations of traditional lending to small business owners who suffered from a severe lack of access as reaching out to physical outlets became impossible. This was more so in non-metro locations that faced longer, unplanned business closures.
To fill the gap, digital platforms are playing an instrumental role in improving financial assistance to small business owners. The online service of document verification, creditworthiness assessment and loan approvals have cut short the overall processing time from ‘many days’ to a ‘few hours’. This has brought about cheaper and quicker access to lending and better prospects for small businesses.