The last two years have seen a paradigm shift in the digital lending space. With SMEs seeking major credit support, the need for better borrower identification has never been greater. It is time to rethink the way SMEs offered credit and the underlying data accessed by lenders to identify the best borrowers. That brings in the need for better credit reports and data access. SME Financing
The SME sector is the backbone of the Indian economy, accounting for over 40% of GDP and employing over 50% of the labor force across the country. This sector continuously growing and is expected to grow at an exponential rate in the coming years. However, the current state of the SME sector is not conducive to growth and is not able to cater to the demand of the economy.
The SME sector
SME is in need of a proper financing mechanism to grow. It is facing a major crisis due to the lack of credit and the lack of awareness among the borrowers.
The digital lending space has been a boon for SMEs, but it has also been a boon for lenders. The digital lending space has allowed lenders to offer better credit products to SMEs. The same is true for the SME as they are now able to access higher credit at a better pace to cater to their needs; both working capital and cash flow.
While major corporations have no problem in availing timely credit, the SMEs are a step behind, always. This stems from the fact that SMEs mostly categorized under the unorganized sector and unable to produce data or supporting documentation to prove their creditworthiness.
Also, their loan amount considerably small compared to corporate loans. Corporate lending institutions are unwilling to spend high cost of operations to service these small ticket loans.
Another constraint is the accessibility of immovable collaterals, which are often difficult to access due to the nature of SMEs and their location. But this is now changing!
SMEs – The New Force In Our Economy
2 years back, when Corona hit, it hit the SME sector pretty hard. The SMEs were the first to suffer enormous losses, both in terms of capital and manpower. But as they say, every dusk has a new dawn; the digital lending space leveraged this new dawn to bring in new opportunities for SMEs.
They started creating novel lending products, specially designed for the SME sector. They actively sought the participation of the Government in raising awareness about their products and services to grass root level entrepreneurs.
With lockdowns restricting the movement of people, internet usage was at its peak. Digital lenders were able to easily tap the internet. nd reach out to needy SMEs and deliver their products and services to them.
The Government also gave a large number of SOPs and incentives to the SME sector. To get the economy moving again. This was one of the reasons why the SMEs were able to get back on their feet.
How Is Borrower Identification Crucial To This Movement?
Most SMEs are located in rural areas. Most business owners lack vital documentation relating to their assets and liabilities. Without the proper documentation, lenders are unable to identify borrowers and assess their creditworthiness.
By using digital methods, borrowers can now link their assets with their identity. PAN card & Aaadhar are the most common digital forms of identity verification. Aadhaar based KYC is now a very good option for borrowers to get instant credit.
There is an urgent need to improve awareness among SME business owners about the benefits of digital lending. And the importance of being a part of a digital lending ecosystem. The SME financing sector is a fast growing industry and it is important that this sector encouraged and supported by the government. After all, they are the backbone of the Indian economy.
How To Create An Optimal Credit Reporting Mechanism For SME Borrowers?
While the digital lending space is not a new concept, the way we have leveraged the technology to create novel products for the SME sector is. However, SMEs still faced with credit rejections due to not enough credit information. Since most of their borrowing used to happen through unregistered lending channels. The credit reporting agencies do not have much information to create their credit history. With very minimal credit history, lenders are not able to assess the creditworthiness and process the credit requests.
To overcome this issue, lenders have now started seeking solutions with the help of AI and machine learning algorithms. These technologies are giving better insights into the credit report of a borrower with minimal credit information. Lenders have started acknowledging the efficacy of these technologies and are now using these platforms to disburse more financing to the SME borrowers.
It will soon be digital everywhere; there is no point denying this. The digital lending space is here to stay and lenders would do better by adopting modern technology. To provide better lending services to the SME sector. AI and machine learning algorithms are the future of lending. We can’t be complacent, however, about streamlining the digital lending space. Better regulations and standards needed to ensure that the lending platforms transparent and fair.
To be successful in the digital lending space and obtain much-needed credit to grow their businesses. SMEs must given the right tools. There is an urgent need to raise SME financing business owners’ awareness of the benefits of digital lending. And the significance of being a part of a digital lending ecosystem. The SME sector is rapidly expanding, and it is critical that the government encourage and support it. Apply for business loans at creditmantri.