New Delhi: Indian MSMEs remain afloat as digital lenders have reached out. As the Covid-19 crisis forces micro, small, and medium-sized enterprises (MSMEs) in India to stay afloat in the absence of incoming revenue and revive their businesses, digital lenders have come of age because they have the advantage speed and adaptability to assess and disburse loans faster, according to a new report.
The Reserve Bank of India (RBI) estimates the total demand for addressable credit from MSMEs in the country at $ 490 billion and the aggregate supply from formal sources at $ 192 billion.
“This credit spread of up to $ 331 billion suggests that traditional lenders are either reluctant or unable to serve this segment of borrowers. In contrast, alternative lenders like FlexiLoans, Indifi, SMEcorner and ZipLoan see loans to MSMEs as a business opportunity, ”said a latest Forrester report.
These digital lenders offer a wide range of alternative loan options, such as working capital loans from Happy, lines of credit from Indifi, start-up loans from Lendingkart, and cash advances to traders from FinBucket.
“They use technologies such as digital applications, automated underwriting, digital verification and digital disbursement to improve risk assessment, speed up loan processing, reduce costs and improve experiences,” said Arnav Gupta, analyst at Forrester Research.
Digital commercial lenders use payment and accounting platforms to find borrowers.
BharatPe informs the customers of the payment solution that they can request a loan and repay it via a percentage of the sales made on the payment platform. Lenders who don’t have their own payment or accounting platform are teaming up with companies that do.
“FlexiLoans offers loans to small businesses based on their activity on the Paytm platform. Digital lenders like Indifi and ZipLoan work with an ecosystem of businesses and markets to gather information about potential borrowers and assess risks before making loans, ”Gupta explained.
Indifi works with food delivery startups Zomato and Swiggy to assess a restaurant’s credit risk by verifying its borrowing history and customer reviews before issuing a loan.
So far, digital business lenders have proliferated thanks to weak competition from incumbents. To compete with them, a few Indian banks and NBFCs have started to improve their game by reducing lending time, improving risk assessment models, and creating end-to-end digital lending processes.
Digital lenders are putting more effort into refining credit risk assessments using data from alternative sources.
They also avoid the cumbersome paper-based application and approval process that traditional lenders use.
Many MSMEs expect flexible loan repayment terms, which the Covid-19 crisis will make more important than ever.
Loan repayment flexibility is something that traditional lenders have always failed to provide to businesses. In contrast, many digital lenders offer repayment flexibility as a feature of the product.
“Lendingkart offers business loans that borrowers can repay in equal monthly or bi-weekly installments, allowing them to adjust their repayments to their sales and billing cycles,” Gupta noted.
Many digital lenders also grant credit for a cause.
“Capital Float provides educational institutions with unsecured loans to improve the quality of education by investing in educational infrastructure. Digital lenders such as FinBucket and Lendingkart are offering preferential loans to women entrepreneurs, ”the report says.
FinBucket connects MSME borrowers with lenders such as banks, offering loans under the national government’s “Stand-Up India” program to help borrowers from different social strata and women entrepreneurs start their own businesses.
Many startups have sought to disrupt India’s business lending landscape, dominated by banks and NBFCs.
Companies such as BharatPe, FlexiLoans, Happy, and Paytm offer credit to small businesses that are already using their services and often tie loans to sales going through their platform.
FlexiLoans has partnered with over 100 merchant platforms to provide point-of-sale-based merchant loans; merchants repay these loans by direct debit on future sales.
To help MSMEs cope with the pandemic, Indifi has partnered with PayU to offer lines of credit to merchants, who can borrow up to $ 66,000 in revolving credit; they can draw on it when needed, and interest is calculated on the amount owed on a given day, the report said.
“Digital disruptors threaten to make incumbents irrelevant by offering products, services and experiences that are more attractive than traditional businesses and at a lower cost. To avoid being disrupted, focus relentlessly on understanding your customers’ needs so that you can give them more of what they want faster, ”the report says.