How technology is transforming lending for SMEs

With over 42.50 million SMEs in India, both registered & unregistered, they comprise a staggering 95% of the total industrial units. SMEs employ about 106 million, which is 40% of the country’s workforce, and contribute around 6.11% of the manufacturing and 24.63% of the Service sector GDP. This staggering number without any dispute shows SMEs are one of the key drivers behind India’s growth. However, they remain the most underfunded segment, with very few SMEs having access to formal lines of credit. 

Key challenges faced by SMEs in accessing formal credit:

• Lack of standardised reporting: Most SMEs in India carry out most of the transactions using cash. As a result, the majority of transactions are not accounted for accurately in the books of accounts. Due to the absence of accurate data on turnover, receivables, expenses, inventory, etc., several creditworthy enterprises miss out on accessing capital at competitive interest rates. 
• Time-Consuming Processes: Given the lack of visibility in financial standing and business track record, lenders perceive advances to small businesses as high-risk lending. Such perception requires lenders to go through stringent due diligence processes to underwrite loans to small enterprises. The entire process of formal lending becomes document-intensive and tedious.

Additionally, suppose the fund requirement is urgent. In that case, traditional lines of credit are not viable for small businesses as it takes a long time for lenders to turnaround the loan application and sanction funds.

• Minimal margins: The small scale of these businesses mean the average borrowing amount per loan is low. The high volume of time, effort, and resources needed to onboard small companies are not justified by the loan ticket size and margins. Even when lenders offer such financing, they are provided at high-interest rates to justify the costs that become unviable for small businesses operating on thin margins. 

With the advent of digitisation, there is an increasing focus on leveraging technology and emerging trends to resolve lending challenges and extend credit to many small enterprises. 

The technology innovations in tools and channels serving as the foundation for transforming lending in SMEs are:

Mobile phones and Internet connectivity 

Over the last few years, one significant development has been consumers’ increasing use of mobile phones to access financial services. SMEs can perform financial transactions and manage finances, commonly referred to as mobile financial services (MFS) or mobile money.

Deeper penetration of internet services has served as the foundation for the delivery of financial products to SMEs. Internet is also a critical component in the digital transformation of SMEs. The use of MFS has given rise to a digital footprint of financial activity.

New-age lenders like Tata Capital are using this digital transaction data and other alternative data sources to develop a new credit risk model to better evaluate an SME’s ability to repay loans. These new models are opening access to financing for SMEs which did not qualify under traditional methods.

Big Data Analytics

Big Data refers to the exponential amount of structured and unstructured data that is generated from various digital sources. The analytics of Big Data helps to make sense of the data by identifying patterns and relationships. 

Big Data analytics provides a wide range of opportunities for SMEs by making it easier and for lenders to observe social and behavioural patterns and assess alternative data points beyond conventional metrics to gauge the creditworthiness of a prospective borrower. Access to alternative data has helped lenders extend financing to borrowers with no prior credit history. 

Digital-first model

Given the health and safety concerns on the rise with the pandemic, businesses across industries are forced to digitise operations. Lenders are migrating towards executing end-to-end loan lifecycle on a digital platform. Right from processing the loan applications to disbursing the loans, end-to-end digital loan processes are now a reality. Tata Capital offers several Digital loans that offer instant approvals and disbursement remotely. 

Digital automation platforms like cloud technology are helping financial institutions in providing a lending process that is fast, agile, and ahead of the curve with end-to-end automation.

Open APIs

Open Application Programming Interface (APIs) are the primary technology enabling Open Banking initiatives transforming the financial service sector. Open APIs are helping lenders access verified data sources providing trustworthy digital KYC solutions for customer identity verification and onboarding. With API integrations to Aadhar, NSDL, MCA, ITR databases, lenders can verify, validate, and appraise borrowers in no time at all, facilitating pre-approved loans or instant loan sanctions and disbursal. 

Lenders can complete underwriting through open APIs and use real-time data to assess SME’s and mitigate risk by lending to creditworthy small businesses.

Technology truly transforms lending and enables lenders to widen their reach and provide much needed financial support to deserving businesses across the country.

SMEs can secure Channel Finance up to INR 50 lakhs and Sales Invoice Discounting up to INR 2 crore using Tata Capital’s Digital platform. The loans are sanctioned swiftly at low rates of interest without requiring much paperwork. Apply Now.