FinTech platforms are using this as an opportunity to process the loans digitally, ensuring a hassle-free experience for the owners of small businesses.
Apart from dealing a cruel hand to public health infrastructure, the COVID-19 pandemic has profoundly impacted the economy. However, Medium, Small and Micro Enterprises (MSMEs) have faced the brunt of the outbreak. With factors like low to zero sales, liquidity crunch and uncertainty of consumption, among others, the contagion has left a large number of small Indian businesses on the brink of closure. According to the Ministry of Corporate Affairs, over 10,000 enterprises shut shop between April 2020 and February 2021.
This comes when MSMEs are among the key contributors to India’s economic activity. Around 63 million MSMEs account for more than 30% of India’s GDP and employ about 120 million people. Still, the plight of small businesses in the country is a concern, and one of the factors is the massive credit gap of $380 billion.
So now, why this gap?
Traditional banks and financial institutions consider MSMEs risky due to the non-availability of consolidated data like ITRs, among others. Now, with the pandemic and prolonged lockdowns ravaging small businesses, they have further reduced their focus on MSME lending, widening the credit gap. This is where FinTech start-ups come into the picture.
How FinTech start-ups are bridging the current gap?
Considering that MSMEs don’t have a large capital corpus, they need immediate access to the working capital to sustain, and this is precisely where FinTech platforms are helping them. Leveraging cutting-edge technologies like Artificial Intelligence (AI) and Machine Learning (ML), to name a few, the new-age lending platforms are paving a hassle-free route to loans with minimal documentation.
To elaborate further, let’s take a look at some of the ways FinTech platforms are addressing the problem of credit availability to MSMEs:
With the increase in the penetration of mobile phones and digital transactions, the pandemic has further paved the way for the transformation. FinTech platforms are using this as an opportunity to process the loans digitally, ensuring a hassle-free experience for the owners of small businesses. Moreover, since all the documentation is done online, the Turnaround Time (TAT) for the loan approval is reduced.
Several FinTech start-ups are providing customised loans to MSMEs as per their business needs. For example, while machinery and equipment purchase can be financed through a term loan (to be repaid in installments in a set period), the need for short-term working capital can be fulfilled through a Line of Credit (a borrowing limit set between an institution and a business/customer that they can access more than once after they have repaid the set amount).
Data-Driven Approach For Underwriting
Using technologies like AI, ML, and data analytics, FinTech lenders can access vast volumes of data of MSMEs from different sources to analyse their credibility. Moreover, it enables them to build accurate profiles even without a credit history (in some cases). Using predictive modelling and other algorithms, the institutions can create a credit score and offer customised loans to help them.
Partnering With Larger Investors
Many new-age financial platforms are partnering with more prominent FinTech investors to provide low-interest funding to MSMEs as it brings additional liquidity at competitive rates. They also use the investment to enhance their data science capabilities, which helps them develop customised solutions for the customers.
The pandemic and the lack of accessibility to credit has slowed the growth trajectory of MSMEs, but FinTech start-ups encouraging small businesses to participate in the digital credit ecosystem will be beneficial in the long run. Why? Because transparent and flexible loan tenures offered by these digital lenders have the potential to transform the way MSMEs access credit.
Source: Business World