Business Webinars, MSME Webinar by Entrepreneurs
- By Shilpa Mankar Ahluwalia
Credit and finance for MSMEs: Access to affordable formal credit has always been a challenge for the MSME sector in India. The business disruptions triggered by COVID-19 and the tightening of liquidity have made this credit problem even more acute. Digital lending fintech platforms have the potential to significantly close this funding gap and have already changed the way the MSME sector accesses credit. There are two main reasons for this, firstly, fintech lending platforms have much lower customer acquisition costs than more traditional banks and lending institutions and are able to serve niche customer segments that have need low value loans. Second, fintech lenders are leveraging their use of technology to develop alternative forms of credit risk analysis using tools like artificial intelligence and big data analytics that enable them to understand and price credit risk efficiently and quickly.
Access to reliable data in an “easy to access and analyze” digital format is central to this business model that will unlock the supply of credit to the MSME sector. Sophisticated data analysis tools also allow fintech lenders to tailor credit products to the specific needs of a particular MSME borrower.
The account aggregation framework, once operationalized, will play a key role in giving fintech lenders access to reliable financial data sets from a potential MSME borrower. Financial data currently resides with multiple regulated entities and it can be difficult for a borrower to collect this data, aggregate it and share it with banks and financial institutions, as is necessary to access credit. An account aggregator acts as the middleman who manages and controls the flow of data and solves this specific problem. The data of a borrower linked to bank accounts can now, under the RBI account aggregation framework is “pulled” from a financial information provider and “pushed” to a financial information user (in this case, the fintech lender). The fintech lending platform will then analyze the aggregated data to determine the types of credit products the borrower is eligible for.
Another important data point that allows digital fintech lenders to understand the business and cash cycles of a potential MSME borrower is GST related data. Today, GST data is standardized, digitally available and reliable, which has created the opportunity for cash flow based loan products for the MSME sector with customer acquisition costs and very low loan processing. This has the capacity to transform the way the MSME sector accesses credit.
The ability to create a complete end-to-end digital customer journey has been an important aspect of the customer onboarding strategy for fintech digital lending platforms, not only to be able to deliver a seamless customer experience, but also to manage costs. .
KYC processes requiring physical document verification were a problem, but the RBI KYC Digital and KYC Video regulatory frameworks have enabled fintech lending platforms to develop remote customer onboarding tools that have dramatically simplified checkout procedures. customer acquisition. The next step will be for regulations to allow lenders to rely entirely on KYC performed by another financial institution, so that as long as all loan disbursements and collections are made through a fully compliant KYC bank account, the lending bank or the fintech platform need not to undertake its own separate KYC from the borrower. This will greatly help to create new distribution channels for low value loans to MSME borrowers.
The ability of fintech lending platforms to bridge the MSME credit gap is also largely dependent on the sources of capital available for these lending platforms. Most digital lending platforms have traditionally relied on a mix of equity and debt capital and have also explored lending models in partnership with banks. Fintech lenders are also now seeking sources of post-lending capital, such as securitization and direct divestiture, to improve liquidity.
To sum up, much of the MSME credit gap can be resolved by fintech lending platforms if they are able to access reliable digital datasets that can aid in credit risk analysis and lending. Based on cash flow, the regulatory framework supports a low cost KYC and customer onboarding process and whether these platforms themselves are able to leverage a wider set of channels for their own sources of capital.
Shilpa Mankar Ahluwalia is a partner and responsible for the FinTech practice at Shardul Amarchand Mangaldas. The opinions expressed are those of the author.