The global economy has been battling to recover and establish a healthy growth rate since the start of the financial crisis caused by the worldwide COVID-19 pandemic. Despite this dip, India has established itself as one of the world's fastest-growing economies. The country's economic progress and stability have resulted in an influx of foreign and domestic cash, bolstering the country's financial position.
In India's economic growth path, Micro, Small, and Medium Enterprises (MSMEs) have been one of the most powerful drivers of growth, entrepreneurship, and employment. The industry accounts for 30% of the country's GDP, 48% of overall exports, and 95% of the country's industrial units. It employs 40% of India's workforce in terms of employment.
Global SME Lending Trends
Small and medium-sized enterprises (SMEs) account for more than 80% of net job generation in developing countries. However, SME financing is required since 40% of SMEs in 128 countries are credit-constrained.
Improving SMEs' access to credit and finding creative solutions to unlock sources of capital is a crucial area of the World Bank Group's activity. Its strategy is holistic, integrating advisory and loan services for customers to boost the economic contribution that SMEs, including underrepresented groups like women-owned SMEs, can make.
The market for loan providers has risen tremendously as the world moves toward the development of SMEs and providing easy funding to these businesses.
Scope for FinTech Solutions in India
According to an IFC assessment, SMEs account for only 6-7 percent of lending and have a credit gap of about $1.1 trillion. The disparity can be ascribed to structural issues such as reliance on previous credit history and lack of understanding of digital lending solutions.
Due to the difficulties in assessing the creditworthiness of MSMEs due to lack of credit history and a preference for collaterals over cash flows, formal lenders only meet credit scarcity 40% of the time.
The SME lending market requires the correct encouragement to convert into a larger and mature enterprise. This goal is dependent on the correct infrastructural assistance and policy to overcome the most significant barrier to MSMEs' sector: enabling market linkage and credit access.
Small and Medium Enterprises (SME) loans have become critical at this point in strengthening the country's backbone.
The era of technology-driven SME platforms
The majority of the credit deficit will need to be filled by structural, market-driven remedies. Thus, fintechs are employing technology to eliminate market inefficiencies, making lending more accessible, affordable, and contextual for MSMEs. Online lending platforms/credit underwriting platforms, supply chain financing platforms (SCF), embedded finance solutions, and revenue-based financing platforms are just a few of the options.
Online lending platforms have revolutionized the SME lending market in India. Companies like Lendingkart, Faircent, Lendbox, SMECorner, and others began as online lending platforms and have since evolved into co-lending or full-fledged NBFC models. Most of these platforms employ several data sources and AI to insure and lend to MSMEs, therefore utilizing technology.
Another interesting approach to MSME lending is to use the anchor ecosystem (large enterprises/brands), which is where supply chain platforms come in - companies like Vayana Network, Credable, Canopi, and others bring the ecosystem of large corporates, vendors, and lenders together on a single platform. These solutions typically have numerous integrations (ERP/Accounting/GST) and provide deeper access to data that is typically unavailable to banks in real-time or at all.
When it comes to data, digital ledger and cloud-based accounting software startups like Khatabook, OkCredit, Hostbooks, and others are not only providing relevant and affordable accounting/compliance solutions, but also sitting on rich structured and unstructured data (transaction, invoice, and GST data) that will open up a plethora of opportunities to enable credit, particularly for micro-businesses.
Future of SME Lending in India
The Indian government intends to increase annual MSME financing disbursements to roughly INR 6 lakh crore by 2023. New-age fintech organizations will employ future development chances to sort through a list of suitable borrowers. At organizations like Indifi, applications are processed today, and funds are disbursed in less than three working days. It is one of India's current fastest fund disbursement rates.
The rise of non-traditional fintech solutions, such as online banking, is expected to:
The dominance of banks as lenders will be endangered as technology advances in the fintech industry.
Banks may cooperate with major fintech businesses to provide more personalized SME lending options for future borrowers.
Future applicants will be relieved because the cost of acquisition will be reduced even further. Even today, lenders are collaborating with fintech firms to streamline the financing process for SMEs.
Fintech companies will provide digital lenders with fast access to their customers' digitally authenticated data in the future. Income tax, GST, equities, mutual funds, and other data that decrease the risk of fraud will be included in this information.
After the data has been validated, the lenders will be able to disburse the funds based on the applicant's needs. This will shorten the time it takes for funds to be disbursed.
MSME lenders are favorably impacting the industry by establishing new doors of opportunity for enterprises who require finance to improve their services and products by providing digital financing solutions.
The SME lending market has largely been taken over by digital fintech companies. Digital lending has also broadened the scope of credit; small-town business owners can now easily obtain finance that was previously only available through out-of-town physical locations.
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