There are over 63 million micro, small, and medium size enterprises (MSMEs) that operate out of India,that are generating multiple employment avenues and contributing to India’s GDP significantly. Despite their key involvement in the nation’s growth, they are unable to realise their true potential due to the limited access to credit. Even today, almost 40% of the MSME’s credit requirement is met by informal sources. This inadequately served market offers a great potential for lenders, digital banks and NBFCs to cater to this segment through tailor-made innovative and digitized lending opportunities. Digital lending can transform the MSME landscape into a more formalised and structured one, driving it to disruption.
How
can digital lending help empower small businesses?
A recent report published by Niti Aayog titled ‘Connected
Commerce: Creating a Roadmap for a Digitally Inclusive Bharat’ concludes
that digital lending has some intrinsic advantages over the traditional lending
model. Some these advantages include faster loan approval, using alternative
data to determine creditworthiness, and cost effective operations.
Risk Free Liquidity - Digitization offers risk free
liquidity to borrowers and creditors in the MSME sector. The adoption of
technology by banks and the increasingly developing fintech sector in India are
streamlining and digitizing every step in the lending value chain to address
the credit accessibility risks and challenges.
Increased credit flow - There can be a significant increase
in credit flow to financially disadvantaged businesses, new credit clients and
informal borrowers. A digitized lending model makes this possible by
eliminating human prejudices and bureaucratic limitations, and by leveraging
borrower statistics to gauge their credit scores, approve loans, disburse funds
and collect EMIs.
Faster Loan Approval - Traditional onboarding of
entrepreneurs takes almost a week and requires the borrower be physically
present. For businesses in remote areas, this becomes a lengthy and cumbersome
process. Digitized platforms such as video-based KYC enable fast-track
registration and compliance procedures; furthermore, advanced facial
recognition techniques and image forensics, speed the verification process
without the actual presence of the borrower and limited or no paperwork.
Using alternate sources of data for determining credit worthiness
- Some of the MSME owners may not have an official credit history;
in these cases, other sources of data such as cash flows, transactional
information and behavioural data can substitutethe standard information required
to underwrite loans. Alternative data such as GST returns, sales records, receivables
and invoices can be collected by artificial intelligence and machine learning
algorithms to determine financial soundness. Such advanced digital lending
models only become more proficient in determining credit delinquency rates,
with the increasing accounting data that they collect and evaluate. These
technologies self-learn through data computation and are capable of detecting
red flags, inconsistent patterns and so on to ensure the loans being
underwritten are free from risk.
Banks like IDFC FIRST Bank, help meet diverse financial needs by providing various avenues of credit accessibility such as Vyapaar Vriddhi Loan for MSMEs, IDFC First Personal Loan for private requirement and Sakhi Shakti Loan for women. The IDFC Loan reviews explicitly mention their easy accessibility to credit and pocket friendly interest rates. So, if you are a small business owner, a woman entrepreneur or just looking for a personal loan, apply through IDFC FIRST Bank to realise your goals.
Final Words
Data is wealth. The plethora of data that is generated in today’s day and age can play a contributory role to narrow the credit gap for small businesses and offer a platform to merchants for easy accessibility to complex financial services. Through evaluation of alternative data, small businesses get an entry into the formal credit ecosystem and with short-term credit options they can build a credit history over time. With access to technologically enabled credit avenues to small businesses, the MSME contribution can be augmented playing a key role in the overall economic growth of the country.
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