Reimagining credit for MSME borrowers
The question of “Am I creditworthy?” is changing to “Who can understand my creditworthiness?”
Credit is traditionally understood as a provider’s market. In popular imagery, the customer, an MSME proprietor, stands in the queue whereas the “manager” intently assesses them from behind the desk. The power equation culminates in any rejection being attributed to the customer’s “credit-unworthiness” rather than the provider’s inability to underwrite that credit.We are in midst of a fundamental shift in that ideology. The lending value-chain and processes are being re-architected around the customer. We are realising that like in any other business, design-thinking and customer-centricity have a key role in credit inclusion. The enormity of this shift is evident merely by the ludicrosity of this realisation, especially to lending-business outsiders. This technology-driven transition is visible in every step of the credit value-chain.
The first element is access itself—credit distribution. For millennia, credit was available where the customer traded. Even the highly vilified moneylender was a merchant transacting regularly with the customer. The birth of the formalised banking system about 600 years ago separated trade and finance. While this drove efficiency, the customer had to “approach” a bank and then other ones if the former did not work out. In recent times, this overhead, coupled with credit rejection at scale, has forced many MSMEs to exclude themselves from the formal financing system. This is reverting to its more natural state of credit being available where customers are. Platforms like Indifi now make credit available within the MSMEs’ business ecosystems—be it e-commerce marketplaces, payment facilitators, or through distributors. Proprietors don’t need to walk into a branch anymore—digital is becoming the preferred mode of credit provisioning. What’s better is that such platforms provide single-click access to multiple lenders—both banks and non-banks—thereby making it convenient for customers to find the right credit fit. The question of “Am I creditworthy?” is changing to “Who can understand my creditworthiness?”.
Embedded credit like this also has a critical influence on the determination of creditworthiness. Much of the disconnect around this is created due to “information asymmetry”—a notion that customers know more about their business than the bank can ever know. This phenomenon is exacerbated by the artificial separation of banking from trade. Once lending becomes “trade aware,” such information asymmetry reduces and lenders can base their decisions on more reliable and real-time information. For example, working capital can be accurately delivered on basis of order and shipment volumes even to an MSME—such consumerisation of trade-linked credit has been enabled by the business model innovation of ecosystem credit and cost reduction owing to technology-based automation.
The other revolution that will progressively reduce information asymmetry is the shift of data rights from data-holders to the customer. The recent launch of account aggregators in India is a historic step in that direction. While currently limited to bank transactions and taxation data, this movement around putting customers in control of their data has the potential to redefine the contours of credit processes.
The third key element of scaling up MSME credit is the ability to drive cost-efficient scale. The absolute cost of granting a `50-lakh loan is not very different from a `2-lakh loan, but the impact on the interest rate for the customer can be very high for the latter. Digital technologies are providing answers to these challenges. India has innovated even more disruptively in this space— the emergence of public digital infrastructure in form of Aadhaar, India stack, UPI, and the enabling regulatory mechanisms have the potential to reduce the operating costs by a lot, making credit more affordable and convenient.
In the not-too-distant future, MSMEs should be able to avail credit on the tap, from right within their natural business ecosystems. A convenient technology-enabled process will put them in control of their finances at minimal cost and effort overheads. Data will flow seamlessly and consensually to provide an accurate view of the business, thereby allowing lenders to compete on basis of their understanding of the customers’ businesses. Supply-wise, the most efficient balance sheets will plug into this infrastructure to reduce intermediation costs that exist presently. All this will happen while customers sit behind their desk and focus on their businesses.