How banks can reimagine lending to small and medium-sized enterprises

Rohit Arora

According to World Bank research, micro, small, and medium-sized businesses account for more than 80 per cent of all industrial companies, employ an estimated 117 million people, and make up more than 40 per cent of manufacturing production and exports. The data highlights how important it is to support MSMEs’ access to inclusive economic growth.

According to the research, one million Indians join the labour force each month. The potential of MSMEs, which are frequently touted as having the power to generate wage employment and entrepreneurship, will determine the fate of the majority of them. However, a lack of proper financial access makes it difficult for small businesses to expand, compete, and create jobs.

Since SMEs help the nation’s economy expand, meeting their financial needs is now essential for banks rather than just a necessary measure. Additionally, banks cannot afford to lose their considerable customer base of small firms to competing SME lenders. Now more than ever, banks must restructure their SME lending operations.

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Why is obtaining a loan still a problem for SMEs?

Small firms find it more difficult to obtain financing when they are unable to establish themselves as large corporations with long-term objectives, diversified lines of activity, and solid financial foundations. These factors all contribute to the lack of creditworthiness transparency and encourage small enterprises to largely rely on unofficial loan sources.

Time-consuming and cumbersome process

Due to the greater default rate, banks frequently find it difficult to view SME loans as a low-risk investment (owing to the lack of documents on balance sheet, credit score, cash flow, income statements, operating performance, etc.). SME owners first encounter time restrictions, and their stress levels are further increased by the need to apply for loans from several banks and the lengthy approval process. The entire cycle, from loan origination documentation through loan approval, is a time-consuming and frustrating task, even if the banks have agreed to disburse the loan.

Difficult to establish rules for evaluating loans

For SMEs to avoid obstacles in their growth trajectory, particularly in the early and growth stages, a timely and proper infusion of capital is extremely important. Banks find it challenging to develop rules for evaluating loans due to the varied nature of small businesses. Additionally, they are frequently quite hesitant to lend when there has been a long-standing relationship with the borrower.

Fragmented data makes lending difficult

Using Excel sheets for manual data entry and collecting frequently results in fragmented data management and extends the amount of time needed to inform borrowers of a loan decision. The loan distribution procedure is cumbersome since the data management solution and the loan origination system are not properly integrated.

Reforming the SME lending industry

Banks can speed up the SME lending process by adopting digitalization through the introduction of online loan applications, an automated loan approval process, and the development of an online platform. They should also start providing small businesses with individualised guidance on banking products and services, as well as support for resolving a variety of business problems.

Banks must categorise small businesses based on factors such as the volume of consumers, business types and profiles, goods, and credit history in order to maintain relationships with current and potential SME clients. Giving all SME segments equal attention and time could cause banks to hesitate before making a final financing decision.

Automating the screening and review process for loan applications will save credit analysts’ time, reduce loan processing costs, and speed up decision-making. By integrating automated underwriting technologies, banking institutions will be able to obtain a competitive edge in the quick-paced digital environment.

Banks ought to lend a hand to early-stage SMEs by offering value-added services, mentoring, direction, and assistance. Small businesses need more than just money; they also need business management resources and guidance on how to carefully manage their working capital.

Also Read | MSMEs must leverage modern tech and innovate, to survive & thrive: Harish Gupta, Head-IT, CGTMSE

Small firms frequently face a wide range of issues at different stages of their financial development, which is why they look for tailored solutions. For small businesses, the ability to connect virtually with relationship managers at banks might be a big relief (irrespective of the geographical location). Through online technologies, banks may start this relationship and let SMEs make appointments.

SME business bank accounts include a wealth of unstructured data that may be used by sophisticated technologies like artificial intelligence, data analytics, and big data tools to enhance lending decisions and more accurately determine the creditworthiness of borrowers.

To conclude

There has never been a better opportunity for banks to expand their credit offerings than now. To adopt new strategies that take a comprehensive approach to the market’s commercial potential, departments can work together across silos, i.e., across the business, risk, IT, and other supporting functions. Banks should position themselves for a successful transition and be prepared to take advantage of the increasing boom in SME lending by improving their strategies, procedures, analytics, and operational models.

Views expressed by Rohit Arora, CEO & Co-Founder, Biz2Credit & Biz2X.

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