How Digital Lending is a Game Changer for MSMEs

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By Pushkar Mukewar, Co-Founder and Co-CEO, Drip Capital

Medium, small, and micro enterprises (MSMEs) are the backbone of every developing economy. Take for instance the Indian MSME community, which contributes about 30% of the country’s GDP. But access to capital has always been one of the biggest challenges for this sector, both in India and aboard. According to the International Finance Corporation’s MSME Gap Assessment report, there is a global demand for almost US$5.2 trillion of capital, wherein US$230 billion is from India alone. The problem is exacerbated by systemic issues with traditional financing methods, especially for SMEs.

In a usual scenario, when in need of capital, a business reaches out to a bank or similar institution for a credit line or a loan. However, such traditional lenders are not always able to serve an SME customer as the cost of service is higher for the bank viz-a-viz the ticket size of the loan required by small businesses. Secondly, if the bank or other similar traditional financer agrees to lend to an SME, the business must furnish collateral in return, along with audited financials of the company – a requirement constrained by regulation. Additionally, the lender’s loan approval can take anywhere between 20-30 working days depending on its internal processes. During this waiting period, chances are that the SME will lose new business, may not be able to service existing business, default on its vendors, etc.

Another major problem that exists among traditional financial institutions is their traditional one-size-fits-all approach. Considering the peculiar problems MSMEs face, their requirements for financial products are unique and cannot be met with this mindset. Traditional lenders have failed to customize their products to serve MSMEs better, leading to a large unmet need for capital.

Lastly, a combination of social, political, and economic developments in recent years have greatly worsened the states of affairs for Indian MSMEs. The much-discussed liquidity crisis, growing fears of non-performing assets coupled with a slowdown in the economy, and the COVID-19 pandemic and its resulting lockdown – MSMEs have faced the brunt of all these situations and their situation is rather dire. India’s MSMEs need help from alternative sources, and one such is digital lending.

The Rise of Digital Finance 

The limitations of traditional institutions have allowed new-age entrepreneurs to think out-of-the-box and leverage technology to introduce innovative products among MSMEs to meet their capital-related requirements. The ongoing economic issues and the need for quick solutions have also allowed such companies – the so-called fintechs – to flourish in the current environment, given that they are often more agile and faster to respond than the oft-cumbersome legacy institutions.

From point-of-sale machines to inventory ledgers, fintech startups are using third-party data to understand the MSMEs’ business needs before servicing their lending requirements with solutions at various stages of the business cycle. With the help of new-age technology such as machine learning, big data analytics, and Artificial Intelligence, these startups can customize products and even service small-ticket businesses and transactions with limited cost and astonishing turnaround times – in some cases less than 24 hours.

As per an Allied Market Research report, the global digital lending platform market was valued at US$4,798.28 million in 2018, and it is projected to reach US$19,884.51 million by 2026, registering a CAGR of 19.6% from 2019 to 2026. Additionally, traditional financial institutions do not see these companies as significant competition either. Considering the opportunity is huge enough for everyone to have a bite, many lenders, including private and government banks, have collaborated with fintech startups to help MSMEs get access to credit. By leveraging such a partnership-based model, many traditional financiers have been able to make inroads into the MSME market, buoyed by the robust digital architecture of new-age fintech lenders.

It is of course only a matter of time before these new fintech companies get their own set of regulations from the Reserve Bank of India. The industry only hopes that the regulations do not disrupt their businesses but instead give them an additional boost and allow them to enjoy the benefits of serving MSMEs just like any other traditional lending company. With a variety of services in the Indian market, fulfilling B2C as well as B2B requirements, digital lending is set to transform the Indian MSME segment in the coming years.

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