Q. What are the challenges faced by small and medium businesses when it comes to accessing credit?
We must comprehend the entire context within which SMEs operate, whether they are small customer-facing retail outlets or manufacturers. They are confronted with various obstacles. SMEs of all sizes are having difficulty obtaining credit as a result of both supply and demand side issues.
When we look at the supply side challenges, we see that lenders have been looking at lending through a secured path, which is a challenge for small SMEs as they need fast liquidity solutions in the form of working capital requirements and bridge loans but the options are small. The second challenge is on the demand side as we see lack of financial discipline and preparation to become creditworthy. Shops lack the necessary documentation to prove their legal existence. Poor banking habits, no separate bank account, limited to no cash-to-bank transactions, and a proclivity for non-full disclosure are industry pain points that make determining a customer’s credit worthiness difficult.
Both banks and NBFCs have taken constructive steps, creating tailor-made customised policies, with the RBI assisting by relaxing a few KYC guidelines. Credit to the SME segment has increased 400% in the last decade, but the sector still remains underserved.
Q. What are the challenges with financing MSMEs and SMEs?
The first problem we face is on the document side, or are they not KYC compliant? The majority of them have been dealing in cash transactions, which luckily is being eased by the introduction of cashless transactions in the form of UPI and payment gateways. Furthermore, the majority of them are below the GST threshold mark, so we do not have a presence via GST, so we go further down to understand the liquid income analysis to understand what kind of income they are making on the cash side, but we have gathered a lot of information about them over the last three and a half years through the use of proprietary learning techniques and optimum use of technology. However, since the market is so vast and underserved, especially in the sector in which we work, the potential is enormous, and we are just scratching the surface.
Q. How can SMEs/MSMEs prepare themselves to leverage more formal finance?
The issue is not the creditworthiness of the SME, but rather the lack of financial discipline; many customers are creditworthy. If SMEs begin to maintain it properly, a large number of lenders may approach them. Education emerges as a result of the fact that they do not find it important to keep the books of account, and this is happening gradually. Many organisations have made efforts and sponsored campaigns to improve their books of accounts, but the situation is still far from ideal. This will be the most significant game changer for them.
Q. How’s the demand for loans in the current market? Where’s the major demand coming in from?
We divide the market category into three sections: essential services, non-essential services that are still permitted to operate (for example, manufacturing is permitted in some states despite difficulties such as supply chain), and the third is businesses that have got closed. The market for each of these varies. Lending to the third segment is difficult, the demand in the second segment is mixed since it is solely based on working capital. If they need a bridge loan, they approach a lender who can meet their needs and when it comes to the first segment, everybody wants to lend because they are doing better business. We are targeting the pharma retail and grocery segments, which already have cash on hand. Though they will not require money; but will require once they plan to increase stock or expand their stores.
Q. How’s SMECorner placed in the credit market? And what opportunity you’re tapping into?
We began by identifying a space within a space in the SME market, deciding to appeal to small outlet customer facing SME. We used technology without a physical contact, but we developed information, such as scorecards, to measure and underwrite these customers.
Q. From which sectors demand is coming in? And which sectors are yet to spring back?
During the first lockdown last year, 6-7 segments were active, but this time the supply chain is active, increasing the scope to lend.
Textiles, luxury goods, footwear, mobiles and white goods have never recovered, and the second wave will take much longer. Temporary latent demand was observed in the aforementioned categories, but it eventually plateaued.
The service industry has taken a far bigger hit than the product or manufacturing industries; the beauty salon has taken the biggest hit, with the fear factor still fresh in people’s minds. Another area that has been impacted is the laundry industry. We don’t know what will happen tomorrow, so this will be around for a while. However, the trends in the fine dining segment are mixed as they moved from pure in-house dining to home-delivery, and we are actively lending even now as they have decreased their reliance on walk-in customers and done well for themselves.
Q. What are the specifics of Women entrepreneur loans?
When we began lending, the majority of the applications came from male entrepreneurs; there are very few female entrepreneurs even today, and even if there are, they are assisting their male counterparts at home; the name of the firm would be of the female, but the show will be run by a male member.
We discovered a lot of women running bakery shops and textile value-added businesses from their homes or next door, and we focused on that segment to see what we could do to support them. We usually need a co-applicant, but when a woman applies for a loan, we do not need one because women are resilient and we value them.