Evolution Of SME Lending In India

The growth of the Indian economy has been phenomenal. The nation’s economic growth has been steady-paced and on the rise. Its financial stability has been further strengthened by the influx of capital from foreign and domestic sources. Small and Medium Enterprises (SME) are responsible for the production of domestic brands and encouraging the development of this sector will contribute to further improvement in the economic condition of the country. SME lending plays a vital role in this agenda.

What are SMEs?

Micro, Small & Medium Enterprises Development Act, 2006 (MSMED Act – Section 7) specifies the classification of enterprises based on the nature of the activity undertaken by an enterprise and the size of the investment. SMEs in India are defined as those enterprises where the investment in machinery, plant, or equipment ranges from Rs. 10 lakhs to Rs. 5 Crore in the case of a service sector enterprise or from Rs. 25 lakhs to Rs. 10 crores in the case of the manufacturing industry. The enterprises can take any form – an association of persons, proprietorship, company, Hindu Undivided Family, partnership, cooperative, etc. Additionally, this given definition is not limited by the electricity consumed by the firm nor the number of individuals employed by the firm.

SMEs in India are blooming in different sectors leading to a tremendous increase in profits. The sectors where SMEs have sprouted include construction, service, agriculture, manufacturing, and other industries. Based on a study, SMEs were the reason for 40% of the total exports in India, and 37% of total industrial output was also found to be contributed by such enterprises. SMEs employ more than 60 million people nation-wide and they have continued to create more than 1.3 million jobs each year. This sector has started opening doors to the urban India of the future as a vast majority of the nation’s population reside in Tier 1 and Tier 2 cities.

Problems faced by SMEs

Even though it has been found that the SME sector contributes to a huge chunk of India’s GDP, conventional methods of running businesses are inefficient. Small businesses are hindered from reaching their full potential due to the low rate at which technology is adopted. Google’s collaborative research with a consultancy firm (KPMG) indicated that 68% of the total 51 million SMEs in India are currently not connected to the internet. This study also discovered that the digitization of SMEs might increase their input to India’s GDP by about 10 percentage. Tech companies have started coming forward, enabling technologies to be available for SMEs to expand and thrive to move on to higher levels of business growth.

In addition to the technological gap, according to the IFC Report of 2018, it was found that SMEs encounter a huge financial gap. Startups at the base of the pyramid are being actively served by microfinance organizations. At the top of the pyramid, corporates are served by banks. However, MSMEs (Micro, Small & Medium Enterprises) have continued to have limited sources to seek sufficient investment.

Traditionally, SMEs were forced to work with low capital. They initially depended on informal financing that proved to be expensive. Supply chain financing was also adopted, however, it had disadvantages like limited bargaining power and limit in vendor choice. This prompted the need for better and novel financing methods.

The factors listed are some of the reasons for the financial challenges faced by SMEs in India:

• No or insufficient credit history
• Weak balance sheet
• Long disbursal period
• Lack of collateral or property to mortgage
• Lack of proper documentation
• Long approval period

Newer finance companies have pushed the MSMEs in India to use technology for their business payments and online sales. This has started to change the dynamics of the lending market with the assistance of venture capital and digital technology. When technological companies work concurrently with SMEs, providing expertise and resources, India’s large SME base will be ensured that it gets the digital assistance it needs badly. In this way, the existing challenges in adopting technology in business finance may soon be overcome and pave the way for an easier process to avail SME loans.

Recent advancements

Smartphones have lowered the cost of data by 95% in the last three years in India. It has become quite common for even small-scale business owners to use smartphones in their commercial activities. Credit decisions are also being made by small vendors using social media platforms.

Digitally empowered SMEs are estimated to have about twice the revenue growth projections in contrast to SMEs who do not adopt internet technology in their business. In recent times, FinTech (Financial Technology) companies in India allow firms with low asset base or low credit score to obtain the required funds on time. FinTech companies can identify the credibility of the applicant’s firm by the online footprint of cash influx. This is made possible by underwritings of digital payment data. In this way, the process of clearing the sme loan application has been made easier for FinTech firms, which in turn has led to new investment opportunities for budding entrepreneurs.

Today, Small and Medium Enterprises are actively opting for new FinTech companies which offer modern repayment facilities based on the demand of their firms. Many FinTech companies provide attractive offers such as an option of customized payment for the business loan applicants. Another added benefit is that credit is provided at a lower cost through a completely transparent method.

FinTech industry

FinTech (Financial Technology) is an industry that comprises companies that adopt technology to provide financial services. These firms operate in industries such as asset management, insurance, payment, and many others. Globally, India is amongst the fastest growing FinTech markets. India is ranked the highest in the world, in the FinTech adoption rate along with China.

In India, the FinTech industry is broadly classified as SME lending, Consumer Lending, and Online lending platforms. In India, SMEcorner is one of the biggest FinTech companies having the resources to check the credibility of the business loan applicants using special parameters. The credibility of the loan applicant and their business can be determined even though the credit score is low, using their advanced algorithm. The reputation of the firm in the market, the desirability of the services or products, bank history, trends of repayment, and a host of other factors are thoroughly considered by the algorithm. Scope of the products and services of an MSME is evaluated to determine if the loan can be given to the applicant. Deep insights into the spending patterns of the consumers are also provided by the team’s advanced data analysis. Once the sme loan is approved, SMEcorner offers the business applicant the flexibility of selecting a convenient repayment method based on their capability.

With the technological advancement in the digital world, applying and availing of a small business loan has become extremely easy and hassle-free. The e-KYC option allows the lender to authenticate the loan applicant via an electronic mode. The verification happens within minutes digitally which fastens the entire process. Applicants also have the option to go for the online electronic signature service using their Aadhar card. Once the sme loan is disbursed, the EMI payments are also done digitally via eNACH services, so the borrower doesn’t have to keep coming back to the business loan provider again and again for repayment. In today’s times, you don’t even have to visit the branch for any kind of discussion as there is an option for Online Personal Discussion with customer care professionals.

Future of SME Lending

With the advance of technology in the FinTech industry, the scenario with banks as the dominant, sole lenders will be changed. Instead, banks may step forward to collaborate with upcoming FinTech companies to offer customized SME lending solutions for prospective business borrowers, causing the cost of acquisition to go further down.

The process of lending is expected to improve by digital methods of lending. Firms that need capital for setting up and developing their products and services will be positively influenced by a reduction in the time of fund disbursal. New-age FinTech Companies like SMEcorner provide access to the digitally verified data of their customers, to digital lenders. Thus, loan applications are processed, and loans are disbursed in less than 3 working days. This is among the fastest rates of business fund disbursal in India currently.