India has established itself as a global emerging market, attracting investors from all over the world. The micro, small, and medium-sized enterprises (MSMEs) sector has contributed significantly to India’s growth. The SME sector accounts for more than 40% of the national GDP and is a critical source of employment. In recent years, digital lending has played an important role in the progress and development of SME businesses. Digital lending has made it easier for SMEs to obtain loans when compared to traditional lending.
Challenges faced by SMEs in the traditional lending model & how digital lending helps you overcome them
- Non-availability of timely funds
SMEs are the backbone of India’s economic development. Through innovation, these businesses contribute significantly to the nation’s growth. The economy has seen a healthy increase in investments in these small-scale businesses, which provide a living for millions of Indians. For small businesses to grow they require funding. The non-availability of timely and adequate funds can dampen the entrepreneurial spirit.
Traditional lending requires the applicant to go through a lengthy loan process that involves lengthy documentation. Digital lending removes these parts from the loan process. Digital lending is done completely online and the required documentation is also very less resulting in a very low turnaround time for the loan processing. While traditional loans take about 10-15 business days to be processed, digital lending is processed in 24-48 hours.
- Loan Approval Criteria
Traditional loans are processed and sanctioned based on the document proof submitted by the applicant. It is made by humans and hence there could be prejudice or error on the officer’s part.
However, digital lending processes are automated and handled by AI-backed operations, along with balance sheets. It also takes into account alternative data, such as the prospects of the business in the industry, to determine the creditworthiness of the business. Using both unstructured and structured data increases the likelihood of well-deserving SMEs obtaining loans.
- Digital transactions during the Corona Pandemic
Nobody gave a serious thought about digital transactions until the Corona pandemic altered the entire payments landscape. With the nationwide lockdowns, most SMEs had to close shop resulting in huge losses. Now, traditional bankers were not quick enough to equip these small-time businesses to thrive during these tough times. But digital lenders and NBFCs enabled these businesses with digital payment facilities that allowed them to continue their business unhindered and make up for the losses. Most NBFCs and digital lenders extended loan terms and provided access to a variety of other services to assist businesses in digitizing their operations.
- Digital loans are more inclusive compared to commercial loans
In major Indian cities, next-generation NBFCs and Fintechs are now catering to small shop owners. The typical loan amount ranges from Rs.1 lakh to Rs.75 lakhs, depending on the entrepreneur’s credit history and the needs of the business.
Several startups in various sectors like fintech, neo-banking, bookkeeping have also played a key role in the digitalisation of small businesses. From point-of-sale machines to e-invoicing ledgers to digital bookkeeping apps, next-generation NBFCs and fintech start-ups can now use alternative data to understand the business needs and cash-flow trends of small businesses and service their lending requirements with solutions at various stages of the business cycle.
- Digital lending allows for innovative SME loan products
Some companies have developed new solutions such as “anti-lockdown loans,” “Sanjivni loans,” and “Digital Lending 2.0,” “Insta Loans,” which provide contactless loans to afflicted enterprises. To help small businesses negotiate the scenario, a number of payment and investment Fintechs have expanded their operations to include loan options such as peer-to-peer lending, quick settlement loans, and simple loan facilities.
- Support from the Government
Digital Lending is receiving more encouragement and facilitation from the Government. The Indian government devised a whole slew of initiatives to support the ‘Digital India’ initiative, including UPI, Digi Locker, Digital KYC, C-KYC, AePS, BBPS, GSTN, TreDs, and others. They aided in the establishment of flow-based digital lending.
The RBI and the government have taken a number of steps to encourage the lending sector to adopt digital technology to process loans. Customers can now be onboarded via video KYC, e-KYCs, and digital signatures.
With the rise in internet connectivity in tier-3 and tier-4 areas, entrepreneurs can now explore markets without being limited by geography. Furthermore, the quick growth of smartphone users in every corner of the country is adding to the nation’s rapid economic expansion. Today, an SME in a rural area can get a loan via a digital channel as easily as an SME in a city.
Digital lending will soon become the primary lending channel for everyone in the nation, not just SMEs but for individuals too.