How the alternate lending sector is simplifying access to credit and helping redeem India's ailing MSME sector

Vivek Tiwari, MD & CEO, Satya MicroCapitalIndia’s MSME (Micro, Small, and Medium Enterprises) sector, one of the key growth engines for the economy,remains a massive untapped opportunity, despite it contributing around 45% toour total GDP. The evidently disproportionate supply of credit to this sector is quite low for the amount of productivity that it is capable of achieving. Traditional banks are usually averse to extending small-ticket unsecured loans to these enterprisesdue to the risk associated with them in the absence of collateral. On the other hand, while microfinance institutions do give out unsecured collateral-free loans to small businesses and entrepreneurs,the fact that these loans are capped at Rs. 1 lakh,limits the potential of these businesses to grow and scale up.
Such huge unmet demand for finance by MSMEs has led to a gap in supply of credit amounting to nearly USD 200 billion, which largely affects the underbanked populations. This is where the alternate lending sector comes in with advanced technology-driven solutions, and with the potential to fuel this growth engine and get it started on a fastergrowth trajectory.

Reinforcing supply of credit through the alternative lending model

The MSME sector is the biggest segment that can benefit from digital lending and financial services, owing to its sheer size. The contribution of 51 million MSMEs in the country is three times that of the corporate sector, yet their rate of survival and growth is dismal. Lending to individuals at the bottom of the wealth pyramid, such as micro and small enterprises, has always been a major problem to solve for financial institutions. The difficulty in lending to them only intensifies with the lack of documented income, data points, collateral, etc among these borrowers. This is where non-traditional data promises to provide a better alternative to conventional underwriting systems.
Traditionally for the MSME segment, lenders have always faced a constraint in underwriting loans because of poor quality of information, understated financials, lack of secondary data sources/ verification.

Probably the biggest transformation fintech has brought about is in the credit underwriting process. Traditional banks and NBFCs have relied on conventional sources of data such as credit bureau scores or income tax returns, which do not accurately convey the performance of businesses or reflect their current position. This system is simply counter-productive, as the performance of small businesses can only be analysed on the basis of the latest financial reports, mostly due to the volatile nature of operations in the MSME segment. Hence, fintech lenders are investing substantially towards data sciences and analytics to develop cutting-edge technologies that offer a much simpler alternative to credit underwriting and scoring when processing loans.

Armed with such advanced capabilities, fintech lenders can derive a business’ credit-worthiness from a variety of data points such as past financial reports, latest cash flow statements, and outstanding invoices, along with social networking data and psychometric analysis. Furthermore, a few advanced underwriting mechanisms deployed by fintech lenders can also determine a micro or small enterprise’s real-time credit score by analysing its transactions with local suppliers or through the enterprise’s resource planning system.

The role of data and technology in an evolving financial services landscape is increasing greatly,which means better access to credit for SMEs in tier-2 and 3 cities. Alternate lending platforms with different models are coming to the rescue of these cash-starved small businesses, while supporting financial inclusion on a large scale within the country. Of late, a growing number of these fintech NBFCs have been taking traditional banks head on by grabbing the opportunity to lend to credit-seeking MSMEs by offering them a wide range of loan products to choose from. The easy and quick application processes on these lending platforms, along with alternative credit scoring algorithms reduce the time taken to process loans. At the same time, since secondary processes like borrower profiling and verification are completely digitised, fintech platforms are able to drastically reduce both their operational costs and the cost of lending, thus giving them a clear competitive edge over banks.

It’s often said that you can’t fulfil the needs of consumers in the present with yesterday’s tools and methods, and expect to be relevant in the future. This is why alternative lending as a sector is poised to disrupt the country’s credit systems as it continues to emerge as an enabler of growth for India’s micro and small enterprises. What we can ultimately expect, then, is for the alternative lending sector to help an ailing MSME sector and get the economy’s biggest growth engine up and running at full speed.