According to CRISIL Research, an independent and integrated research house, the value of micro, small and medium enterprises (MSME) lending market in India is now worth Rs 14 lakh crore. The global analytical company further forecasts that the MSME financing market will grow at a compound annual growth rate (CAGR) of 7% in near future. But the credit potential of individual MSME units still differs across industries and clusters. A number of studies even suggest that a large percentage of small and medium enterprises still find it difficult to access and avail credit on time.
The new age lending institutions leverage latest financial technologies (fintech) to bridge the huge gap between demand and supply in SME financing. In addition to accelerating loan disbursement, the fintech even enable lending institutions to offer innovative business lending solutions. But the SMEs still have to face a number of challenges to raise funds and access credit on time. The financially literate entrepreneurs address these challenges in SME financing in India successfully to access credit on time.
Identifying Common Challenges in SME Financing in India
Making Entrepreneurs Financially Literate
A number of studies describe India entrepreneurs as financially illiterate. They do not track and understand the latest financial technologies. Likewise, many entrepreneurs still consider that the online lending options are not secured. They even hesitate to apply for business loans online through the official websites of lending institutions. The lending institutions must make entrepreneurs financially literate to get a slice of the growing Indian SME lending market.
Unavailability of Modern Technologies
Many lending institutions nowadays avail credit to business owners based on their monthly debit and credit card sales. The POS-based loans even enable borrowers to avail credit by routing more sales through POS machines. But many entrepreneurs still do not promote cashless transactions. The data released by the Reserve Bank of India (RBI) even depict a consistent decline digital payment since the currency in circulation reached the pre-demonetization option. The SMEs cannot avail technology-driven loan products without investing in advanced financial technologies and devices.
Emphasis on Excellent Credit Score
While processing a business loan request, lending institutions consider the entrepreneur’s personal credit score and his business’s credit history. But a large percentage of lending institutions provide unsecured business loans to SMEs whose owners have excellent personal credit scores. But many entrepreneurs still lack the skills required to improve personal credit score and build business credit history. The entrepreneurs must work consistently on improving credit score and building credit history to access credit on time.
Cumbersome Appraisal and Disbursement Process
Many SMEs prefer traditional banks to alternative lending institutions to avail credit at low rate of interest. But the traditional banks require borrowers to meet strict credit criteria and submit elaborate documentation. They even need additional time to process the business loan request and disburse funds. Hence, it becomes difficult for SMEs to avail credit on time to fund working capital needs or manage cash flow. Many borrowers even avail credit from alternative lending institutions to curtail loan disbursement time.
Non-Standardized Project Appraisal
The lending institutions assess cost and risk of lending based on a number of factors. Which is why; the eligibility criteria for individual business loan products differ. The lenders even evaluate the business proposal or projects submitted by the borrower based on various factors. But they do not follow are predefined rules or preset standards for project appraisal. The lack of standards makes it challenging for borrowers to prepare business plans and lenders to evaluate the business plans.
Complex Collateral Requirements
Often SMEs find it easier to access credit to expand existing businesses. But entrepreneurs still find it challenging to avail business loans to start businesses without pledging assets as collateral. Some alternative lending institutions even provide credit at very high interest rates to new businesses and start-ups. Many entrepreneurs in India still opt for various schemes launched by the Government of India to avail credit to set up a new business.
Absence of Many P2P Lending Platforms
In October 2017, the Government of India recognized peer-to-peer (P2P) lending model officially. The Reserve Bank of India released notification on P2P lending industry only in January 2018. Hence, the entrepreneurs still lack the option to take advantage of online P2P lending platforms to connect and interact with various lenders directly. The NBFCs are yet to get the regulatory approval required to launch online P2P lending platforms.
On the whole, the latest financial technologies help lending institutions to address common challenges in SME lending in India. But the entrepreneurs must be financially literate and adopt latest technologies to access credit without any hassle and delay. Hence, both lenders and borrowers have to resolve many issues to become a part of the growing SME lending market.