How digital lending has the potential to unlock the underserved MSME segment

MSME lending landscape is now shifting, with formalisation and digitisation driving the market towards disruption. Digital lenders, in partnership with traditional lenders, are solving the major challenges in providing credit through managed cost levers. Piyush Khaitan, Founder & M.D. of NeoGrowth Credit Pvt. Ltd; Founding Member and first President of Digital Lenders Association of India (2016-17) Jayanti Kathale is the founder of 'Purnabramha', an authentic Maharashtrian cuisine restaurant chain, who had plans to build a global brand. Jayanti left her cushy job in the IT sector where she worked with organisations like Infosys for over 13 years. Purnabramha was started as a small venture with limited funds but eventually, Jayanti needed more working capital to scale up.

Traditional lenders turned her down due to lack of collateral and financial returns. It was at this time that Jayanthi approached a new- age fintech firm for credit. The firm evaluated the daily earnings and cash flow of her business through the daily card swipes at her restaurant and extended her a working capital loan. Propelled by the loan and further renewals, Jayanti was able to run her restaurant without worrying about capital crunch. Purnabramha has now opened multiple outlets in metros as well as in Australia and the US and Jayanti has been expanding her business through a franchise model which is exclusively for women entrepreneurs. Micro, Small and Medium-sized Enterprises (MSMEs), like Purnabramha, are crucial for the socio-economic growth of emerging economies. Nearly 50 percent of global MSMEs still lack access to formal credit, making financial inclusion a key priority. The main barriers preventing MSMEs from accessing bank credit are collateral requirements, lack of credit history, and informal natureof business leveraging on the convergence of urban retail, digital payments, and lending.

 

Digital lending players are pioneering innovative lending models leveraging alternate data for underwriting. To further tailor the lending product to the retailer’s business model, the repayment modes are flexible through NACH, payment settlements to align them more to the convenience and business cyclicity of the merchants.

 

There are around 60 million MSMEs in India, contributing to 30 percent of India’s GDP thus being the backbone of the economy. As per the recent Omidyar-BCG report on Digital MSME lending, the MSME credit demand in 2018 was estimated to be Rs 45 Lakh Crores, of which 40 percent was served by informal credit and around 25 percent through personal proprietor (rather than business) loans, demonstrating the shortcomings of the current lending process. This underserved market is a huge potential for MSME lenders and digital players to cater to, with innovative business models tailored around the needs and behaviour of this Across India, the MSME lending landscape is now shifting, with formalisation and digitisation driving the market toward disruption. The biggest challenges concerning this segment in accessing traditional finance are long processing times, lack of transparency in timelines, and insufficient loan sizes. Digital lending can address the challenges in traditional processes through alternative approaches to sourcing, underwriting, and servicing. MSMEs, particularly those with annual revenue less than Rs 10 lakh are increasingly turning to aggregator platforms to access new customers. With the changing behavioural landscape amongst MSMEs, lenders focusing on alternate methods of underwriting have evolved gradually and are serving niche segments. Alternate sources, such as entity data (from MCA, EPFO, etc) and social media data, utility data (telecom, electricity, gas, internet, vehicle registration, etc), transaction data (e.g., point-of-sale credit card trails) and financial data trailssegment of MSMEs.