How disruption in lending benefiting MSMEs?


MSMEsThe recent disruptions caused by new age finance companies has undoubtedly been a big help to the MSMEs (Micro, Small and Medium Enterprises) who had so far been provided scant attention by the Banks and the established Non-Banking Financial Companies (NBFCs). The fintechs have boldly announced that there is gold in the unexplored segment of MSMEs and this has even forced the traditionally languid, incumbent players to move a leg.

Stating that the new fintech enabled world will wrest the market share from the large established banks would be trivialising the challenge. But it is unmistakable that the fintech disruption will forever change the way the world of financing has so far operated.

The fintechs are providing to their targeted customers, either funds or are offering solutions like payments, analytics , data management  that make their businesses more effective. The disruption being caused by the fintechs is benefitting the MSMEs in many ways:

  1. Improved flow of funds

The first obvious benefit to MSMEs that is accruing from the disruption by the fintech lenders is the access to funds. There are over 5 crore such small and micro enterprises that have negligible access to organised financial system. The fintechs havenow started to open the window that can now shed light on the Rs 5trillion debt demand gap that presently exists in the MSME market.

  • Direct Lending: A number of new age finance companies have set themselves up as a licensed NBFCs but with an innovative approach to lending. While some of the new age fintechs have targeted excluded market segments like the micro enterprises or the small enterprises that have faced challenges in accessing adequate levels of credit. There are others who have targeted the supply chain of large ecommerce or wholesale players or the trade transaction discounting approach to garner an expanding base of customers thorough efficient modes of origination and delivery of services. Aye Finance, Capital Float, Neogrowth are some of the new age financiers that belong to this set.

These new entrants have overcome the challenges of limited documented information available with the MSMEs  by using a variety of alternate underwriting methods thatuse psychometric tools, behavior modelling, transaction analysis and data sciences that may be further refined using machine learning capabilities.

They are working on bringing down the unit costs of origination and servicing of these loans by using the existing supply chain linkages and cloud based automation applications. The adoption of digital payment methods and use of established universal digital infrastructure e.g., Adhaar, Indiastack, UPI and Bhim payments and the like,have further helped them disrupt the status quo.

  • Agents of lenders: There are then some other new age finance companies that are not lending to customers from their balance sheet but are white labelling their products for the benefit of a large established bank, or are offering a common marketplace platform where loan applicants can shop for a suitable MSME loan from a choice of many bank lenders. The arrangements can be in form of ‘first loss’ default indemnification by the fintech company or through co-share of the revenue or simply on the basis of a finders fee payment. These companies help use their technology and analytics to originate loan applications for the large bank. They usually also help underwrite the loans and can even process repayment of these loans efficiently. The banks can thus supplement their lending books by using plug and play solutions from these fintechs. SMElending, Loanbazaar, Bank Bazaar are some examplesof this set.
  • Market Makers:The third category of fintechs in this space are helping flow of funds to the MSME segment through disintermediation of the bank-lending model through a direct peer-to peer lending or crowdsourcing platforms. These create a ‘many’ to ‘many’ mapping of investors and the MSME company. Faircent, Lendbox, i2iFunding are examples of this.
  • Enabling the Lenders: A fourth category of fintech players are making available specialised data driven services like extraction of underwriting data from a variety of sources and computation of credit scores. These fintechs are thus addressing the 350 million credit invisible people without a documented credit history. A number of these individuals are MSME industry owners. This assists the established banks and finance companies in making lending decisions to segments like MSME that lie at the margins of organised bank lending. Companies like Credit Mantri, Perfios Finomena and Rubique fall in this set.
  1. Payments and Business Cash flow

Another big category of benefits to MSMEs result from the activity of fintechs companies in the facilitation of payments. Businesses require a safe and efficient channel for the flow of their business transactions. The new age payment technologies have reduced the transaction costs of MSME businesses – whether it be digital wallets or digital payments like UPI or bank based payment channels like NACH, IMPS , NEFT etc. Businesses have saved time, and enabled smoother flow of transactions with superior customer experience. Paytm, Mobikwick, Freecharge are some examples

Although the growth in the retail and consumer payments markets through the mobile wallets and fintech innovated payments methods has been brisk, the effects are less pronounced in the corporate payments market. It is estimated that 80 per cent of economic transactions in India still happen through cash, as opposed to around 21 per cent for developed economies.

  1. Business Solutions

Fintechs are rapidly making affordable, technologies such as artificial intelligence, machine learning, blockchain and IoT (internet of things) with a wide range of potential use-cases. This is an opportunity for MSMEs to leapfrog their business capabilitiesand benefit from such leading edge techniques.MSME DNA has typically been entrepreneurial and nimble. I wouldn’t be surprised to see some of the forward looking MSMEs begin to use these methods to innovate and leap ahead in their lines of business.

In conclusion, the fintech startups have the potential to disrupt and bring on a new way of financing the MSMEs, however they presently lack the scale, experience, regulatory support that the banks and established finance companies enjoy. Fintechs are rapidly establishing customer trust and loyalty and have already started nibbling into the fringes of the bank’s market such as the MSME segment. MSME’s are a big beneficiary of the fintech disruption.  This disruption is beginning to usher in a change in the focus on funding MSMEs and also in the qualitative way MSME’s lifetime value in a lender’s portfolio is viewed.

The views expressed in this article are of Sanjay Sharma, founder of Aye Finance.

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