Finding digital methods to plug India’s large credit hole is no longer just a hypothetical quest. The 63 million enterprises that fuel nearly 30% of India’s GDP are staring at a Rs 25 trillion credit hole. Thankfully, a silent revolution is already powering banks, NBFCs, and aggregators for a much-needed solution – the need to embed digital solutions to ensure that our SMEs and MSMEs thrive and grow.
While banks and financial institutions realised the need to smarten their legacy systems, it was mostly a time-consuming and resource-intensive process. The legacy systems did not offer a true picture of the credibility of a business or an MSME. Take, for instance, a sweet-shop merchant who pays a rent of Rs 500,000 per month and serves thousands of customers. A loan request by such a customer would often take days. Today, the digital channel and AI-driven models are not only spreading smiles but doing what should have been done eons ago- empowering MSMEs. There are three fundamentals to this digital credit innovation.
THREE: TECHNOLOGY IS TURNING SMART
The rigid parameters that governed MSME lending are a thing of the past. Financial institutions realize that audited balance sheets, income tax filings, and immovable collaterals are great, but these are only monolithic data sources. A vast number of small retailers, logistics aggregators, rural manufacturers, artisans, and other MSMEs may be unequipped to furnish such data.
Thankfully, there is technology to combine multiple data points and build an architecture that is not only smart but also adept at lending. Such platforms leverage advanced data analytics, machine learning, and cloud computing to assess borrowers beyond paperwork. These platforms also enable lenders to plug into digital ecosystems such as GSTN, UPI, bank account aggregators, and utility bill payment histories for a much holistic financial view of a business. This kind of contextual lending offers MSMEs what they need most: a line of credit matched to their real-time business needs, not legacy documentation.
TWO: THE BIG DIGITAL REALISATION
Across the industry, digital credit innovation is seen as more than about smoother lending or opening a bank account. RBI’s assessment of Financial inclusion at a recent score of 64.2 is a good barometer. The study further adds that access and usage have notably improved, but quality? Well, that can be improved through better digital channels. The industry is right in proactively scouting for embedded finance so as to make it available where and when businesses need it.
Embedded finance solutions allow MSMEs to access credit during the natural course of operations rather than going through a separate and often cumbersome loan process. Such embedded models, powered by API-first architectures, help deliver working capital loans, invoice discounting, or credit lines. Not only is wait-time reduced, but from a lender’s perspective, the cost of customer acquisition is reduced, and the availability of newer data could help lend with confidence. Over time, such interactions help build credit histories for first-time borrowers. This is a healthy realisation understood by the government, the finance ministry, the regulator, the banks, and even MSMEs.
ONE: ALTERNATE DATA BUT COMPULSORY GROWTH
The financial services industry is witnessing growing cases of AI adoption and the leveraging of alternative data. Both can help fill the trust gap between MSMEs and formal lenders. These models detect fraud patterns early, enable personalisation, and improve the quality of underwriting. For a lender, it opens up the ability to tailor-make a loan instead of offering a one-size-fits-all product.
Surprisingly, it is no longer just a trend. While Boston Consulting Group analysed that digital processing techniques reduced loan processing times by up to 70% and improved approval rates by 30%, the RBI’s Account Aggregator (AA) system has already facilitated secure and consent-based data sharing. Many organisations have already commenced a viable journey towards digital transformation; however, we need to ensure that it is free of bias, empowers customers, and is also interoperable to support the financial system.
Digital credit innovation may be perceived as a silver bullet, but it is a powerful bridge. While the credit gap of Rs 25 trillion is indeed huge, our capacity to bridge it meaningfully may not be possible through just spreadsheets and branch visits. Our objective should be to do more than just fill that credit hole. If we can bridge it, we could create a destination where India’s next wave of small businesses could create more opportunities for the economy. It could push MSMEs to a new orbit and offer consumers a bang for their buck.
Also Read: Fibe secures ₹225 crore through NCD to accelerate digital lending
Views expressed by: Rohit Arora, Co-Founder and CEO, Biz2Credit and Biz2X
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