Here's How Digital Lending Platforms are Changing the Ecosystem for MSMEs Uncertainty and delay in loan disbursement, high processing fees, lock-in periods, preclosure charges make access to credit near impossible to many entrepreneurs. FinTech firms are disrupting the borrowing space

Anuniti, a homemaker till a couple of years back from Koramangala in Bangalore, started a catering business 18 months ago. It has become extremely popular because of her innovative ways of leveraging Instagram and Facebook. Regularly sharing posts of her recipes started garnering a lot of interest from the start-up community for their lunch and quick-eat needs in her locality.

Anuniti has tied up with Zomato and Swiggy recently and to meet the growing demand, she needs to scale up her business. Renting a bigger space, adding 4 more staff, extra stoves, food processors and getting her website ready to take online orders and payments required a capital of around INR 4 lakhs for which she approached the formal financial institutions(FIs).

With her business being a small scale business and her low credit bureau score, most of them denied her a loan. Some took a lot of time to even give her a decision about her eligibility for the loan in spite of her monthly revenues crossing INR. 80,000. The few that could consider giving a loan, quoted a very high rate of interest that just did not make sense. This situation did not help Anuniti's cause of becoming unit economics positive soon. Now the budding entrepreneur is in a fix.

Conventionally, Anuniti is left with no other option but to borrow money from local money lenders at very high rates but now, thanks to new age fintech platforms, she has new avenues to avail the credit she needs. With the RBI regulating the P2P lending segment in India in 2017, this is now allowing new players to disrupt previously unexplored avenues in alternate finance and credit under-writing. These digital lending platforms have also helped in deeper credit penetration to the underserved.

Problem of Millions who Want to do Something

Like Anuniti, there are millions of underserved borrowers in India who face problems because of a lack of easy access to credit. Usually, access to loans through orthodox channels is a time-consuming, cumbersome process and involves a lot of physical documentation. The uncertainty and delay in loans at times causes irreversible losses. And finally, hidden fine print like high processing fees, lock-in periods, and loan preclosure charges make access to credit less affordable to many credit-starved entrepreneurs.

New-age digital lending fintechs are overcoming these challenges and disrupting the borrowing space in India. A few of these companies have created a niche, using their own proprietary algorithm that looks beyond traditional ways of assessing the borrower with just 3-4 parameters and instead perform an all-round assessment to decide a borrower's credit worthiness. According to the World Bank records, in 2018, the credit bureau coverage for MSMEs in India has been as low as 10%.This is evidence enough to bring in alternate data sources for underwriting MSMEs which have a huge potential in shaping the rise in Indian economy.

How Digital Lending Platforms Help

As per a recent report by BCG, about 5 million loans have already been disbursed to individual borrowers and MSMEs through new age digital lending marketplaces, that has saved numerous Anunitis from falling into a loan trap by local lenders.

By making the loan lifecycle simpler and easier through "3-1-0 model of lending, three minutes to decide, one minute to transfer the money and zero human touch', the new-age digital lending platforms are disrupting the lending industry in the country. But this model still needs validation and support from regulator and government initiatives to work in large scale.

The new-age lending platforms have started leveraging Artificial Intelligence and Machine Learning capabilities to generate valuable insights from additional data sources. For instance, analysing digital footprint has helped bring in a holistic assessment of borrowers. Removing manual touch points has also accelerated the time required for credit decisions. In Anuniti's case, these platforms would use alternative credit scoring, by analyzing her facebook page, the number of social media followers, monthly cash-flow, number of orders on Zomato/Swiggy, GST data, Anuniti's personal spending pattern and her bank statement, to sanction her a loan that could possibly get disbursed on the same day.

By aiding small businesses with finance, these platforms are helping in employment generation apart from encouraging "Make In India' and thereby assisting in the overall financial growth of the country and most importantly in creating new businesses that are thriving because of good business models.

In addition to being more accessible in comparison to traditional financial systems, these digital platforms also provide flexibilities around making prepayments and foreclosing of a loan at no extra cost to reduce the burden on borrowers. These new-age platforms which serve as a springboard particularly for underserved borrowers to develop a good credit history can further help them in obtaining credit from other outlets in the future.

As a nascent industry, these pioneers are paving the way forward to build trust, reliability and changing the way alternate financial services are perceived in India. Government bodies like RBI have also come up with regulatory norms to control the digital lending platforms. RBI sanctions NBFC P2P certificate only to companies which adhere to its strict norms and maintain transparency. By relying on data-driven insights for better predictability, and adhering to RBI guidelines, the new lending space triggers lifelines like instant disbursement, loan top-ups, and loan re-application, etc in a more safe and secure manner.

Way forward

Overall, the convenience and seamless experience of using digital lending platforms and their ability to fill the credit gap for both underserved individual and enterprise borrowers is leading the sector towards its exponential growth. These platforms, however, will never eliminate traditional FIs from the lending ecosystem. They will instead partner and collaborate with the incumbent Financial Institutions to build a balanced and inclusive lending infrastructure in India. They will collaborate and co-exist to support and inspire millions of Anunitis in the country.

The synergy between these tech-enabled platforms, data-based insights, and scale of the traditional institutions will open up exciting avenues for expanding the credit reach to a large set of underserved segment in the coming future.