Richa Jha, Product Manager, Nucleus Software, showed her presence at Elets 13th NBFC100 Tech Summit, organised by Elets Technomedia and the Banking & Finance post. She shared her views on the digital lending landscape.
In India, there are more than 63 million small businesses that could benefit significantly from the right technology and partnership. These small and medium enterprises (SMEs) are critical to the Indian economy, constituting 95 per cent of all industrial units and contributing 33 per cent of the country’s GDP. Furthermore, the sector employs 120 million people, making up 40 per cent of the workforce, and contributes 50 per cent of the country’s exports. Despite the significant contribution, there remains a gap that presents tremendous opportunities for financial institutions (FIs) and fintech companies to collaborate and create value.
The lending sector for MSMEs registered a growth of 92 per cent last year, increasing from 169,000 crores in Q1 to 325,500 crores in Q4. Beyond lending, there are niche opportunities in credit demand, technological advancements, export financing, supply financing, and advisory services. As India’s GDP is expected to reach $5 trillion, MSMEs will play a pivotal role in accelerating this growth, with the sector’s exports projected to reach $1 trillion by 2028.
The growth rate has doubled, yet there still exists a significant gap of INR 25 trillion, which they consider both an opportunity and a challenge. They strongly believe that SMEs play a crucial role in most economies, particularly in developing countries. However, this sector faces many obstacles, such as limited access to funding, which is the second most common challenge. Small organizations tend to receive less funding than larger ones, which forces them to resort to informal sources of lending, such as internal funds, loans from friends and family, or local loan sharks. Unfortunately, these types of funds are poorly documented and often lead to exploitative behavior toward business owners, resulting in bad debts and terminating their longterm opportunities. The magnitude of this issue is evident in the INR 25 trillion funding gap.
To enable effective digitization, Financial Institutions (FIs) must listen to the needs of SMEs. Listening involves not only perceiving sound, but also paying thoughtful consideration to what is being heard and taking actionable steps. To simplify digitization further, they have identified four pillars: data, tailored solutions, automation, and ecosystem. By using the right data, FIs can offer SME owners lending solutions that can be applied or approved in minutes. This requires collecting existing data, and using advanced analytics to create tailored solutions for potential customers. Additionally, a recommendation engine that uses machine learning patterns and algorithms can draft solutions to meet customer requirements. They have observed that 33 per cent of SME lenders are willing to use these tailored recommendations, and data-driven recommendations have higher success rates.
One of the most talked-about trends in modern technology is automation, which can significantly reduce the time required for lending origination. An automated end-to-end lending origination system can bring the time to under 10 minutes. Integrations with the right fintech can create an intelligent ecosystem that benefits SMEs who are willing to use these kinds of services to improve customer delivery.
Nucleus Software is a next-generation lending solution, with composable architecture designed to meet the present and future needs of all retail and corporate lending, including MSMEs. Nucleus Software holds a 75 per cent market share, with over 5 lakh daily users, and has managed $500 billion in loans on its books. Its end-to-end lending solution starts from sourcing through customer acquisition management to servicing, with a robust collateral management system. The system is tailored to meet the requirements of every financial institution, and its personalization brings together technological advancements for the maximum benefit of SMEs and financial institutions.
They are looking for easier credit facilities for SMEs, including micro and short-term loans, profitable and instant loans for unbanked and new-to-bank customers. They have envisioned this solution and now need to find a way to overcome the obstacles that exist in the lending industry such as poor accessibility to funds, inadequate documentation, and slow technological adoption. By collaborating with the right tech platform and leveraging the four pillars of digitization, and can overcome these obstacles one by one.
Firstly, a suitable tech platform can provide mobility and digital channels to field agents so that they can offer SME lenders the right product or solution, such as short-term loans, discounting, or any other relevant product. Secondly, by integrating with Digi lockers or implementing KYC checks or upload-safe functionality, a tech platform can help SME lenders to collate and organize documentation efficiently. Thirdly, a multi-level validation system in any tech platform helps SME lenders to comply with regulatory requirements, thereby maintaining a high level of integrity. Lastly, creditworthiness assessments and pull systems for customer acquisition enable tech platforms to provide advanced technological development to SME lenders.
By leveraging technological advancements, the organisation is able to offer our customers the value they need to deliver better loan sourcing, faster onboarding, better loan servicing, and reduced delinquencies to their own customers. To achieve this vision, they have developed a platform that caters to every niche requirement and addresses the obstacles faced in the MSME sector. Their technology has enabled a 24x increase in mortgage loan volume for India’s largest private bank, and have maintained a 29 per cent CAGR over the past two and a half decades, serving 70 million customers.
Access to finance is a critical factor in unlocking the potential of any economy, and well-funded SMEs can have a significant impact on creating a more self-reliant, self-sustainable, and less volatile economy. Through the use of the right tech platform, businesses can enhance their capabilities and achieve their vision.
Views expressed by Richa Jha, Product Manager, Nucleus Software.
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