Credit and finance for MSMEs: With established risk management practices and a diverse customer base, leading banks are well on their way to embracing the digital lending revolution.
Credit and financing for MSMEs: Narayan urgently needed working capital to handle the booming demand for his restaurant. However, due to lack of formal credit, traditional lenders could not meet the requirement. That’s when Narayan learned that digital lending platforms were offering small unsecured loans to small business owners. He applied online and got a loan within days. Based on his daily transactions, cash flow, and consistent business metrics, he managed to secure the funds.
This has been the big success story of digital lending in India – giving small businesses timely capital. With over 6 crore SMEs operating in India and over 90% of these SMEs extremely underserved, the gap between supply and demand is estimated at over Rs 7 lakh crore by 2023 and is expected to grow significantly. exponentially over the next decade. Thus, the need of the hour is to ensure the expansion of digital lending services and the empowerment of small business owners.
Why digital lending
Multiple factors have contributed to this growing gap between supply and demand. The lack of warranty and/or digital footprint has often caused problems for small business owners. This is where digital lenders have found tremendous success and, by delivering faster credit decisions, a seamless customer experience, lower operating costs and a more secure risk profile, the new era digital lenders have created an innovative business model that is here to stay.
Ease of use: Digital lending startups offer full automation of end-to-end lending services, such as loan origination, information exchange, transaction matching, loan servicing, record keeping, cash flow management, etc. This has drastically reduced the turnaround time for the entire process, resulting in a much more convenient and consistent customer experience now.
Efficient and profitable operating model: Digital lenders realize significant savings. First, without the need for physical branches, lenders have lower capital expenditure requirements and are therefore able to scale quickly. Second, digital lenders have a lower acquisition cost through innovative acquisition channels such as ecosystem partnerships, social media (Facebook/Instagram), company website, etc. And finally, lower document collection costs. Automated collection mechanisms, such as NACH, have simplified the collection process, enabling cost savings through optimal resource allocation. Overall, new era digital lenders reduce acquisition and maintenance costs and have therefore been able to successfully offer competitive interest rates to the end consumer.
Win-win for traditional lenders: With established risk management practices and a diverse customer base, major banks are well on their way to embracing the digital lending revolution. By digitally leveraging data through robust credit underwriting models, banks can successfully open up other revenue channels and realize significant cost savings.
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Better credit underwriting: Technological advances such as machine learning models and big data analysis supported by artificial intelligence algorithms promise to create accurate underwriting techniques and increase business viability. This has made it possible to disburse loans to small businesses more quickly. Moreover, over time, these benefits can also be passed on to customers with lower and very attractive interest rates.
Improved transparency: There have been significant public infrastructure initiatives to enable digital lending. With e-KYC, improved access to Aadhaar, Jan Dhan account creation, GST implementation, etc., millions of people can be part of the digital lending growth story. This has improved transparency across the lending ecosystem and will benefit deserving customers in the future.
Future Market Trends
With the growing online presence of businesses and the growth of lending platforms, the industry will continue to be influenced by data-driven decision making. Groundbreaking government initiatives such as the Bharat bill payment system will continue to successfully digitize and formalize Indian SMEs. Few Digital Lending Market Trends projected for the future are:
Innovation to transform the SME lending journey: New-era fintech companies are rapidly gaining market share through their innovative product offerings and partnership-based operating models. With major banks embracing digital lending, we can see greater innovation among new-era fintech companies, credit bureaus and third-party service providers, improving the lending journey – customer service, problem resolution. customer problems, widening access to credit, etc.
Data and analytics disrupt the lending chain: Indians are increasingly digitally savvy, leaving a digital footprint that fuels algorithm-based alternative lending models.
Technological advances: India will continue to see breakthrough innovations in technologies such as biometrics authentication, e-signatures, e-money orders, etc. This will make the process transparent, allowing easier access to credit.
Over the past few years, digital lending startups have mushroomed and thus attracted significant capital from big-name investors. They are well positioned for accelerated growth in the years to come. Traditional banks are also redefining their business models, opting for the online-first strategy, to further penetrate the massively underserved SME lending market. With the gap between loan supply and demand set to grow exponentially, the future of digital lending is bright.
Alok Mittal is Managing Director and CEO of Indifi Technologies. The opinions expressed are those of the author.