The fundamental cause for the lack of credit from banking institutions is the absence of a proper credit score and credit history, both of which are mandatory requirements while applying for a loan
Small and Medium-Sized Enterprises are the backbone of the Indian economy. They play a pivotal role in the growth of the GDP of the country. Hence, it is vital to look at their lending needs and provide them with credit as and when required. However, most MSMEs face impediments while acquiring working capital from traditional banks. The fundamental cause for the lack of credit from banking institutions is the absence of a proper credit score and credit history, both of which are mandatory requirements while applying for a loan. Needless to say, SMEs suffer considerably as they are considered risky and not credit-worthy by conventional banks. Hence, SMEs are gradually gearing towards digital lending platforms where it is easier to acquire small-ticket loans without much paperwork or documentation. A borrower can apply for a loan of anywhere between Rs. 1 lakh to 75 lakhs depending on his credibility and other driving factors through digital lending platforms. Such platforms, specifically Neobanks, are working towards buttressing this segment by furnishing them with the right kind of loans without much hassle.
Furthermore, many SMEs were unaware of the potential of digital lending and how it can transform their business until the pandemic struck. The economy was massively hit which further fuelled the decline of working capital by traditional banking system. Digital lenders quickly realized this gap between demand and availability of loans and closed this gap by offering the SME sector bridge loans which not only met their financial needs but also kept their businesses running. Providing them with an adequate line of credit and various lending solutions have helped them at the nick of time to tide over their business needs efficiently.
A major advantage of acquiring a digital loan is the prompt disbursement of credit which is not the case with conventional banks. The latter follows a very tedious process when it comes to loan underwriting. Relentless paperwork, cumbersome process of verifications, sluggish assessment of creditworthiness, among others are some of the common deterrents that slow down the entire process of lending,which can further stall the growth of businesses. Digital lending on the other hand is quick and effortless as it is just the technology at work. Digital lending platforms make use of new-age technology – data, AI and ML which makes it easier to evaluate the borrower in no time. Moreover, lenders do not have to physically visit their bank branch innumerous times to get an update on their disbursement. All a borrower needs to do is sit back on his/her chair and digitally upload all the relevant documents and the loan gets approved in a jiffy.
Traditionally, commercial banks are more focused on providing secured loans and not every SMEborrowerhas the capacity to furnish such security. Rather, unsecured and no frill loans are what they are looking for at this hour. However, providing unsecured loans can get a little tricky as risks of default runquite high!So here’s where the power of technology comes to optimum use,digital lenders make use of big data analytics to evaluate the creditworthiness of the borrower. Besides, the use of psychometric tests, balance sheets, and other borrower patterns help them to map the credibility of the lender. Both unstructured and structured data plays a pertinent role in the quick evaluation of the borrower’s profile and eventually helps expedite thegrowth of the business.
At present numerous FinTechs and Neo banking platforms are designing a slew of lending solutions that have been tailored to meet specific needs of borrowerssuch as quick settlement loans, instant loans, P2P lending, flexible repayment schemes etc, thathelp businesses which have been severely hit by the pandemic and other underlying factorsto revive and meet their financial needs.
To sum up, digital lending platforms have significantly contributed to the burgeoning growth of SMEs. Getting a loan as and when required is extremely essential to rekindle the growth of the SME sector in the present times.
Source: Business World