Small businesses play a critical role in shaping India’s economy and also generate jobs for millions. However, micro, small and medium enterprises (MSMEs) face severe challenges while looking for business loans.
These businesses are often perceived to be in the high-risk category due to their smaller capital requirements and limited credit history. MSMEs are also known to face problems during the loan application process.
However, a host of digital lenders have emerged to reshape the lending landscape, especially for MSMEs. These have streamlined the loan application process by reducing the turnaround times (TATs) by over 90% in many cases. TATs that would stretch into weeks have now been cut to hours, say industry observers.
“MSME borrowers face major problems during the loan application due to archaic and complex processes that include lengthy applications, substantial paperwork and lengthy verification processes,” says Manish Lunia, Co-Founder, Flexiloans. “Geographical constraints and the absence of a physical branch network restricted access to financial services for many MSMEs for decades. This is one of the most significant constraints that digital lenders have unlocked by being able to reach the hinterlands. As per market data, some digital lenders originate over 50-70% of their loans from tier-2 and -3 towns and below. Most traditional lenders continue to demand substantial collateral, making it challenging for asset-light MSMEs to secure loans despite having cash flows.”The key challenges faced by MSMEs today are inconsistent cash flows and liquidity crunch, largely due to the seasonal nature of certain businesses, says industry stakeholders. Demand for capital to stock inventory varies throughout the year. For instance, demand for credit among sellers of consumer goods peaks before festive season or e-commerce channel sales open; there is a higher liquidity need among businesses in the construction industry in summer and winter.
“The traditional underwriting focus is on stable cash flows in the form of average bank balances and consistent profits,” says Nishith Maheshwari, Head, Partnerships, SME Business Loans, InCred Finance. “However, such an approach fails to consider the reinvestment made by smaller enterprises back into the company and the above-mentioned seasonality. At InCred, underwriting focuses on cash flow analysis and consequently, we can provide customised options to our borrowers.”
Tech to make life easy for MSMEs
Digital lenders are revolutionising the way MSMEs apply for loans by focusing on accessibility, speed and simplicity. “They offer user-friendly digital platforms and multi-modal resources to submit loan applications online, eliminating the need for physical visits and paperwork. Applications can be made over app, website, call and other partner networks. According to published papers, digital lenders have dramatically reduced the loan approval time from weeks to days,” adds Lunia.
Digital lenders rely on creating technology and software solutions or amalgamating best market solutions for seamless onboarding, high-quality underwriting, and risk assessment and loan management. These tools analyse extensive data, including credit history, transaction records and financial statements, allowing for personalised loan offerings that cater to each MSMEs’ specific needs.
“We have digitised the entire credit journey for the customer, from application to disbursement. Moreover, through third-party SaaS applications and API stacks, we also extract other data about the digital footprint of the borrower — reviews/ratings on platforms the customer sells on, revenue via marketplaces, number of deliveries via logistic partners, POS machines and payment gateway revenues, and inventory conversion cycles via inventory management tools. In addition to financial statements, these give us adequate comfort without hassling the customer for additional documents,” says Maheshwari.
Helping MSMEs simplify complex documentation and procedures
Lunia says FlexiLoans has reduced need for documentation depending on the loan requirements, thickness of data available for the customer and relies heavily on independent and easily accessible cash flow data from MSMEs for underwriting like GST, sales purchase data or banking transaction information.
“The TATs are further reduced by a systematic process management and use of India Stack features like digital collections, digital KYC and documentation required for disbursing loans,” he adds.
Similarly, Maheshwari says their proprietary algorithms generate pre-approved loans with immediate sanction for MSMEs on certain channel partners. “We also make use of built-in models that assess the applicant’s eligibility with minimal input data and help us in achieving a TAT of as low as two days. With the use of various data, we get an understanding of the customer’s revenue generation patterns and spending analytics. This ensures minimal documentation and reduces our to-and-fro with the customers. Because of end-to-end digitisation of the credit process, the borrower always remains updated about the progress of not only their loan application but also their queries and complaints,” adds Maheshwari.
