P2P Lenders to the Rescue of MSMEs Access to credit is one of the most painful points among the MSMEs in India. However, with alternate data, GST data stack and AI-driven algorithms, MSMEs are hoping for a change in the credit positions - P2P lenders have stepped up to take up the challenge.

The Indian Micro, Small & Medium Enterprise (MSME) sector is massive. There are more than 60 million MSMEs in the country. The sector contributes 30 per cent to the country's GDP and employs over 100 million people. And yet, often it is declined formal credit that helps keep businesses up and running.

According to an Omidyar Network and Boston Consulting Group's report, the SME credit gap in the country is close to $600 billion and almost 40 per cent of MSMEs borrow from informal sources at double the interest rate. Most of the SMEs fail to raise funds due to inadequate financial records, lack of credit histories etc.

Also, from a bank's perspective, the cost of servicing an MSME loan is higher as opposed to a corporate loan. With the constant need to keep their NPAs in check, banks tend to avoid servicing MSME clients. However, with the age of digitalization, reorganization of informal players in the sector led by the GST drive and growth of alternative lending platforms, there is a new ray of hope for the sector.

The same report suggests that India's open digital infrastructure, unmet customer demand, and leapfrogging digital behaviour have the potential to benefit a broad range of players and MSME digital lending can grow to $80-100 billion in annual disbursements. Having said that, a year or two ago, one could have barely imagined how peer-to-peer (P2P) lending startups would contribute to this growth trajectory.

Building the Bridge

P2P platforms have now realized the importance of SME credit and also, it can potentially act as the chorus for the sector's growth story in the future. Rajat Gandhi, CEO and Founder of Faircent.com, which has disbursed 64 per cent of its total loan in 2018 to SMEs, says with P2P's digital platform, paper-less and presence-less process cuts intermediary cost, thereby, offering faster and cheaper credit. P2P lending is offering a ray of hope to a large chunk of the unbanked and under-banked population of India.

"By going beyond traditional means of credit evaluation and using tech-driven underwriting algorithm, the industry has brought thousands of SMEs under the purview of organized credit," Gandhi says. With the country's GDP expected to grow, the MSME sector is bound to improve and rise above the stagnancy it has remained confined to. Bhavin Patel, co-founder, LenDenClub feels that there is a huge opportunity for P2P platforms to fund these SMEs as well as their employees.

"Higher aspiration of individuals and SMEs will bring a huge future growth in P2P lending. According to ICRA, the share of lending by Non-Banking Financial Companies (NBFCs) to MSMEs is projected to rise to 23 per cent by March 2022 from the current level of 15 per cent. If P2P loans will come to support, SME lending may touch 30 per cent," Patel says.

The Regulatory Block

While P2P players are trying hard to solve at least some part of India's SME credit issue, but it won't be an easy task. At present, when it comes to financing, SMEs generally do not evaluate P2P as a source of funding due to lack of awareness. With education drives, the players are hoping to rope in more SMEs on their platform. More so, the present NBFC-P2P regulation is giving them nightmares. From a regulatory point of view, the Reserve Bank of India also needs to relax its P2P guidelines.

Presently, a company seeking registration as an NBFC-P2P needs to show Net Owned Funds (NOF) of not less than Rs 20 crore and it cannot raise the deposit under Section 45I(bb) of the Act or the Companies Act, 2013. Additionally, the P2P players also cannot make their own books. This guideline caps aggregate exposure of a lender across all P2Ps to Rs 10 lakh. The same cap is applied to a borrower. To top it all, the exposure of a single lender to the same borrower cannot exceed Rs 50,000 and the maturity of the loans should not be more than 36 months.

Ambar Kasliwal, director and CRO, PaisaDukan. com says, "The cap on exposure is limiting P2P lending sector's growth, regulators might be playing safe but for its growth, they need to focus on scrutiny rather than limiting the business. Such a small cap of lending P2P platforms cannot create volume and cannot serve MSMEs, which historically have remained underserved."

Connecting the Dots

SMEs often fail to share relevant data to access their credit report and digital players, including P2Ps are required to connect dots while servicing the sector. This combined with low data confidentiality, Patel says, creates the biggest assessment problem for lenders.

"A lot of time, SME credit assessment is also linked with an assessment of the individual who is running the show. To address these, P2Ps have developed their own AI-analytics based model, which evaluates several data points that are not readily available in physical documents and assess the company along with the person who is the vital force behind it. This methodology helps us do a better assessment of SMEs, which is not possible otherwise," he adds.

So, players like LenDenClub use the bank statements to understand a company's cash flow, while other players like RupeeCircle and CashKumar use alternate data and personal financial data of the entrepreneurs or self-employed individuals to access their ability and stability to repay the loan. "We have our proprietary algorithms and policy to assess the credibility of borrowers on the platform. The system analyzes loan applications based on credit reports and financial statements. We use a lot of alternate data as well to gauge the ability and intention of potential borrowers. SMEs can be a tricky group when it comes to credibility checking. It is thus, other parameters like tax records, customer feedback could be of help apart from the normal credit and financial checks," Dhiren Makhija, CEO, Cashkumar Dhiren Makhija, CEO, Cashkumar points out.

With the new financial year, it remains to be seen whether this trend would pick up the pace or not and whether SMEs and P2Ps will continue to support each other in the coming years.