The demonetization initiative by the government of India triggered a significant shift in the financial atmosphere of the country. Not only did Indians start gravitating towards “cashless” in their day-to-day lives, the digital trail of electronic transactions also led to the rise of alternate sources of lending, with Fintechs being at the core of it all. While the unanticipated change took businesses by surprise, and arguably the change in cash positions caused a momentary blip in trade momentum, it buttressed the ecosystem data that served as a harbinger of a much needed and much awaited change – the arrival of formal credit for SMEs.
How Alternate Lending Emerged
Lending institutions, both Banks and NBFCs need credible information to make credit decisions. Typically credit history provided by bureaus e.g. CIBIL, is a key ingredient to this process. However, considering India has had lower than desired credit penetration, the industry faces the classic Chicken and Egg problem. This is where securing first loan/credit and building credit history becomes an enabler.
Demonetization and other steps taken by the government over the last few years, has helped to create potential “alternate-data repositories” that provide clues to one’s credit worthiness, albeit in a not-so-direct fashion. Combined with technology, these small and sometimes non-intuitive morsels of information break the information deficiency as the entry barrier. This is when few Indian Fintechs rose to the opportunity. While many people were finding relief in cashless digital wallets, many small businesses discovered sustenance through companies such as ePayLater. These Fintechs began offering a line of credit, which could be used by SME as a working capital.
Moreover, bad loans and higher non-performing assets have forced most banks to rethink their lending strategy. Interestingly, for the year 2016, 54% of the total loans went towards the corporate sector with more than 80% of these corporate borrowings being concentrated among top 200 companies. As per the RBI report, just 12 big corporate houses are estimated to account for 25% of the gross NPAs. SMEs, which contribute around 45% to the national GDP hardly, get any access to credit. However, SMEs whose contribution to the NPAs is almost negligible have been the only sufferers here! Fintechs are rapidly rising to the occasion and facilitating SMEs to avoid availing loans from informal sources at exorbitant rates of interest.
The Dilemma of the Unbanked
India has over 50 million SMEs and less than 10% have access to credit. Many of them are centered around rural and semi-urban regions. As a result, a vast segment of these is still unbanked and untouched by any form of credit. Most have little to no credit history. Banks, which majorly rely on credit history to approve loans, are wary of lending to them. Adding to their woes many lack sufficient documentation, which does not make the process any easier. This is where Fintechs and their technology-centric innovation in data science step in.
Leveraging Data Science
Fintechs such as ePayLater leverage data science to utilize alternate data to assess the creditworthiness of an applicant. ePayLater uses advanced machine learning techniques to do real-time credit assessment by leveraging data such as buying patterns with the merchants, digital footprint, social media information and device information. Thus, they are even willing to extend credits to businesses who have no history of availing credit before. The process involves minimal paperwork, the approval is instant and the credit disbursement is done within a day or two. The service involves no hidden cost and the credit line extended is completely collateral free. Working capital assistance and favorable credit terms make this credit solution even more enticing for the businesses.
Financial Inclusion of SMEs
India has skipped a step from being an agricultural economy to directly becoming a more service-based economy. Industrialization, in its true sense is yet to be realized. It would then not be amiss to state that SMEs form the backbone of our industrial sector and are a source of employment for the rural/semi-urban population. SMEs in India form 40% of the total workforce and contribute 45% to industrial output. Fintechs are reshaping how these businesses get access to credit. Fintechs are not only providing credit, but ensuring independence and sustenance of these SMEs. Furthermore, they are aiding in developing a credit history for these businesses, undoubtedly including them in the list of creditworthy businesses for the future.
The lending landscape is still taking shape and will undergo some major changes in the coming few months. Internet access, mobile technology and public awareness will be some strong driving factors in reshaping the landscape of SME lending.
About The Author
Akshat Saxena is a Co-founder of ePayLater, having 10+ years of work experience spanning leading Technology and financial firms such as – SAP, Oracle, TransUnion. Akshat holds an MBA from MDI, Gurgaon and B.Tech from DA-IICT, Gandhinagar.