Raj N, Founder and Chairman of Zaggle, speaks with TheSMEIndia.com about how SME financing has evolved and what initiatives may be taken to improve SME lending in India along with their partnership with VISA.
Here are the excerpts of the interview.
- Please take us through the SME ecosystem and your interaction with the sector
The MSME sector is India’s backbone, accounting for over 67 million SMEs across the country and accounting for the majority of GDP. The sector is our country’s greatest employer, and with Covid-19 wreaking havoc on physical work, small industries that were supplementary to larger companies were hit hard. We pondered how we could assist SMES in becoming more connected to the ecosystem and spoke with over 500 SMEs, identified their pain areas, and devised a solution to help them become a part of the ‘Atmanirbhar’ Bharat.
The sector’s two pain points were revealed. The first is credit access, and the second is information access. Even for receivables, they have to rely on note pads or small pieces of paper because software solutions are too expensive. As a result, as a company, we came up with a solution that can be utilised even on a mobile handset to help them manage their case flow.
SME’s have the ability to operate independently and as a major corporation. However, SME’s lack software tools due to their lower capital. Even if we are able to provide timely information to 15-20 million SMEs, we will provide them the potential to grow from a small to a medium to a large company.
- Any instances from the last few years that you can provide?
We can all improve if you tell us what our position is. What you can measure is what you can improve. You can’t improve if you don’t measure. Small and medium-sized enterprises (SMEs) include organisations with a revenue of more than Rs. 50 crores. Knowing their cash flow on a minute-by-minute basis will allow them to improve how they do business. They will be unable to run their business unless and until they produce a daily journal entry on receivables and payments. It is estimated that a SME owner spends 90% of their time managing cash flow, and if they struggle with this, they will struggle with prompt payment of salaries, wages, and management of raw material costs?
Our company offers a ‘Business Finance Manager’ solution for SMEs that allows them to monitor their cash flows as soon as they submit accounting data into the system, which is then recorded in a single dashboard and is visible at any point of time. This generates a report of money shortages and surpluses, based on which we issue a preapproved credit in the form of a credit card. They can draw any pre-approved amount in the app, ranging from Rs. 1 lakh to Rs. 10 lakhs, depending on their needs on a tap.
Today, credit cards for consumers are available, as is unsecured lending, so why can’t it be extended to a small business with a good track record that is based on cash flow rather than collateral based?
- How has SME lending changed over time?
From my earlier days, when SME lending was concentrated on four touch points, namely banks, local money lenders, institutions like SIDBI, and chit funds, or from your friends and well-wishers to today, when technology is driving the fundamental change, where SMEs can show their performance and borrow money against it rather than providing collaterals is the biggest change.
- What is the requirements of SMEs, long term capital or working capital?
SME lenders may not be able to supply long-term capital, only banks or larger organisations will be able to provide as long-term capital is heavily influenced by compounding interest rates and the quantity borrowed. SME’s today demand short-term working capital for less than a year, or on require it on an ad hoc basis, or from one purchase to the next. SME’s can now seek loans from a range of lenders for machinery, raw materials, and operating capital. They can also get money against their bills through bill discounting or factoring.
- There are a number of SME lenders out there looking to provide loans, but SME owners aren’t sure where to look for loans. How can we address this gap?
The simplest way to deal with this is to compile all of the data from all conceivable lending sources for small businesses. They can be classified based on the amount of loans they provide, which could range from a few lakhs to crores of rupees, and their ability to address a wide range of market needs, such as machinery financing, raw materials financing, vehicle financing, or companies that promote buying material from their website and offer 90 days of credit, which is another type of lending. All of this is feasible thanks to the way Fintech companies work in this industry. Fintech has revolutionised the way India conducts business. People nowadays are able to dream large, become entrepreneurs, run enterprises, and flourish as a result of their capacity to obtain funding at the appropriate moment and at the right price.
- In your view, what could bolster SME lending in India?
Among the possibilities are the following:
1 Big funds that invest in fintech for the long term and then channel the money to SMEs
2 SMEs ensure that prepayments are made on schedule, allowing lenders to extend more credit.
3 Subvention that the Government of India may be able to provide in the lending area for SME’s
4 Dedicated banks that only lend to SMEs in order to understand their needs.
5 More digitisations may aid in the scoring of SME’s. This will enable us to establish a bureau dedicated solely to SMEs, comparable to the consumer bureau, so that SMEs may improve their consumer capabilities.
Raj added, that SME’s currently account for 25% of the company’s revenue. They have a comprehensive suite of products in the works for the SME sector in the future, including the creation of their own bureau score in the form of alternate data. Raj concluded the conversation by saying that SMEs are helping India become Atmanirbhar, and that the government should cut credit rates for SMEs and SME’s should embrace technology.