How technology is easing lending process by synergising banks and SMEs

Gaurav Aanand

COVID-19 impact on receding the global and Indian economy has been immense in last 18 months and is far from over. The Indian economy shrank by 9.6 per cent in 2020 with the debilitating effect of lockdowns and the continued threat of the pandemic. The economy is expected to witness recovery in 2021 with a growth rate of 7 per cent but the market sentiments stay uncertain.

MSME’s were impacted on multiple fronts during Covid

The MSME segment has been especially vulnerable as many businesses were forced to shut down indefinitely during country wide lockdowns. On the supply side, businesses experienced severe shortage of workforce due to mass labor migrations to native regions and blockages in raw material supply chain. On the demand side, domestic consumption spiraled downwards with rise in unemployment and supply chain disruption and in turn impacted the revenues of the enterprises severely. The compounding effect of these challenges led to significant liquidity crunch. A report by ILO in 2020 indicates that 9 out of 10 MSME enterprises experienced a shortage in cash flows arising out of significant revenue reduction caused due to demand shortage.

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According to RBI’s data, the credit growth of SMEs has slowed down to 0.5 per cent in March 2021 from 1.7 per cent in March 2020. Even after the provision of several schemes by Central and State Banks for financial support, availing of credit remains an arduous task for SMEs. As a result, the pandemic saw the rise of informal credit dependence of MSMEs.

Government Initiatives are critical

The central government had brought forth a special economic and comprehensive package of INR 20 Lakh Crores to various sections including MSMEs with INR 3 Lakh Crore under ECLGS- the Emergency Credit Line Guarantee Scheme in Mar’2020. This was revised to INR 4.5 Lakh Crore in Mar 2021 and the scheme has been extended to Sep’21.

Digital platforms as a default lending interface

Digital lending to MSMEs was poised to grow between INR 6 and 7 lakh crores in annual disbursement by 2023; pre pandemic, as revealed by the Omidyar Network India. The pandemic brought to fore the limitations of traditional lending to small business owners who suffered with severe lack of access as reaching out to physical outlets became impossible. This was more so in non-metro locations that faced longer, unplanned business closures.

Also Read: We are leveraging power of digital to help SMEs combat Covid-19 challenges: Sudarshan Chari, Head- Business Banking, DBS Bank India

As a result, a colossal behavioral shift is underway as MSME owners take to digital adoption – In June 2021 alone 72% of recorded payments done by MSME’s were through digital mode alone and 23% MSMEs leveraged Ecommerce to make sale. The estimate of digital adoption by MSMEs may only need to be revised further upwards post-pandemic.

Digital Platforms are playing an instrumental role in improving lending to MSME’s. The core value lies in enabling a fair, efficient and inclusive access to credit. MSME’s, by connecting digitally to lenders -both traditional and NBFC’s; they have visibility to a wide array of loan products. Also, the online service of document verification, credit worthiness assessment and loan approvals have cut short the overall processing time from ‘many days’ to a ‘few hours’. This has brought about a cheaper (when compared with informal lending market rates) and quicker access to lending.

Views expressed in this article are the personal opinion of Gaurav Anand, CEO & Co-Founder, Namaste Credit.

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