How can SMEs avail alternate credit?

A reformed approach towards MSME lending by the ecosystem – including digital marketplaces, fintechs and the traditional banking sector will play a pivotal role in bridging the existing credit gap and ensuring that these enterprises can effectively realise their true potential over the next few years. By leveraging digital technology and riding on the tailwinds of MSME-focused government initiatives, they are well poised to solve the crisis of credit that MSMEs in India face today.

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MSMEs are India’s growth engine, accounting for nearly 30% of GDP, 40% of the workforce and 40% of exports. The MSME sector is growing at ~10% year-on-year; however, despite rapid advances in technology across various sectors of the economy, this sector has not been able to harness technology for growth. Over 80% of the MSME sector functions in the unorganized segment with no traceability of business operations, digitally. As a result of this, the gap in India’s MSME financing is huge with only 4% availing formal financing channels and a $300 billion financing gap that needs to be addressed urgently.

The answer to solve this massive credit gap lies in using data & technology to build models of credit scoring using alternate data which Banks and Financial Institutions (FIs) can trust and use as the basis of granting credit to MSMEs. Currently, the gap exists primarily due to the lack of the kind of traditional data & information among MSMEs – like Bureau score (CIBIL) and extensive audit-based documentation – that FIs use to make credit decisions about India’s more than 6 million strong MSME sector. While bigger firms like manufacturing can mortgage their machineries as collateral against loans, 98% of the micro sectors remain under-served as they fail to do so.

This is where e-commerce platforms which are working to digitize India’s MSMEs are playing a critical role.

Digitizing traditional supply chains not only leads to opening of newer markets for growth in overall commerce transactions between small businesses, but also becomes an important turning point in bringing this segment into the formal economy, thereby, helping them get easy access to affordable growth & working capital.

With deeper penetration of smart phones & access to internet in Socio-Economic Class (SEC) D & E segments now, data will continue to grow exponentially in the Indian market. Innovative B2B e-commerce platforms focused on the MSME sector are plugging into these data sources and, with the help of technologies like Artificial Intelligence (AI), Machine Learning (ML) and Blockchain, building end-to-end technology-led commerce and financial services solutions supported by business solutions. This will help solve problems across customer onboarding, alternate data-based credit scoring and underwriting, digitising operations and improving the efficiency of supply chains.

How would an alternate data-based credit scoring model work? An example will illustrate this point. A young, new-to-credit kirana store owner selling groceries may be digitally well-connected and aspiring to become a mid-sized retailer by expanding his network of suppliers and buyers through a B2B e-commerce marketplace. His challenge would be to get finance as he has no prior credit history, no earlier loans or credit cards and no Bureau presence, thereby making him a risky proposition for traditional underwriters. He is however, known to be trustworthy, pays his suppliers on time and saves regularly.

What he requires is a radically different credit assessment model, which evaluates not just his ability to pay, but his financial habits and his willingness to pay, based on alternate data obtained by analysing his bank statements and GST, his store’s operational data, litigation data and psychometric data, among others. A big portion of alternate data-driven models with sophisticated machine learning and data analytics would help to measure his behavioural aspect on willingness to pay.

Through this model, his litigation attributes like pending court cases, operational attributes relating to his store and services, psychometric assessment through interactive games, would all be measured. Leveraging data from Blockchain technologies would provide a strong foundation for the new-age credit underwriting models employed by fintech lenders and e-commerce marketplaces driving such initiatives, ensuring faster and much better access to credit for MSMEs located even in remote cities and towns of India.

Furthermore, having a digital footprint and a strong alternate data-based credit score, an MSME player would be able to connect with niche set of MSMEs. With transparent and smooth transactions, his business would grow in almost real time. Sustaining a strong and consistent transactional performance would not only make the player best-in-class on the platform, it would also open the doors for his business expansion, fulfilling his credit needs.

To summarize, a reformed approach towards MSME lending by the ecosystem – including digital marketplaces, fintechs and the traditional banking sector will play a pivotal role in bridging the existing credit gap and ensuring that these enterprises can effectively realise their true potential over the next few years. By leveraging digital technology and riding on the tailwinds of MSME-focused government initiatives, they are well poised to solve the crisis of credit that MSMEs in India face today.

The blog has been authored by Subhashini Parasuraman, Head, Brand and Marketing, SOLV.

DISCLAIMER: The views expressed in the blog are solely of the author and TheSMEIndia.com does not necessarily subscribe to it. TheSMEIndia.com will not be responsible for any damage caused to any person/organisation directly or indirectly.