CRISIL Research forecasts 11% compound annual growth rate (CAGR) in lending to micro, small and medium enterprises (MSME) in India, over the next two fiscals, way faster than the ~7% growth anticipated in bank credit to India Inc. The independent and integrated research house further estimates the size of MSME lending market around Rs 14 lakh crore. Both traditional banks and alternative lending institutions contribute hugely towards making credit available to SMEs.
The business lending companies allow entrepreneurs to choose from a wide range of conventional and technology-driven business loan products. They even leverage advanced financial technologies (fintech) to accelerate business loan processing and disbursement. So many small business owners nowadays prefer NBFCs to commercial banks to avail credit in a simple and faster way. There are also a number of factors that has been transforming SME lending in India consistently.
Understanding the Factors Transforming SME Lending in India
Application of Latest Financial Technologies
In India, both traditional bank and new age lending institutions have been leveraging fintech make credit available to entrepreneurs. In addition to bridging the gap between lending institutions and borrowers, the financial technologies also enable lenders to offer innovative business lending solutions. For instance, many NBFCs nowadays leverage fintech to provide POS-based loans to SMEs based on real-time financial data like monthly sales routed through point-of-sale (POS) machines. Some lending institutions even allow borrower to repay the POS based business loans by choosing from multiple daily repayment options.
Lending Market Digitization
Its digitization contributes hugely towards the consistent growth of the SME lending market. Most lending institutions nowadays allow borrowers to apply for small business loans through their official websites. The borrower can further gather detailed information about each business loan product by reading the information posted on the lender’s website. The websites allow borrowers to apply for a specific business lending solution by following some simple steps. The borrowers even have option to upload the required document in digital format. The SME lending digitization has helped NBFCs and fintech companies to grab market share from traditional banks.
Emergence of New Age Lending Institutions
A number of studies suggest that SMEs often find it difficult to avail credit from traditional banks. The traditional banks reject small business loan requests due to a number of factors in business loan eligibility criteria – low credit score, poor credit history, less number of years in business, and inadequate collateral. They even take additional time to process and disburse business loans. On the other hand, the NBFCs and fintech companies provide credit to business owners in a simpler and faster way. There are a number of NBFCs that disburse terms loans to entrepreneurs within three working days. Which is why, a large number of entrepreneurs nowadays prefer alternative lending institution to traditional banks.
Direct Interaction between Lenders and Borrowers
The latest financial technologies have provided borrowers and lenders with a platform to connect and interact with each other directly. Unlike conventional business lending solutions, peer-to-peer (P2P) lending model enables SMEs to avail credit from one or more lenders. They can connect with multiple lenders through an online marketplace which is both open and transparent. The P2P platforms further allow business owners to share their financial details and needs with the prospective lenders in a convenient way. In October 2017, the Government of India recognized the online P2P lending industry officially. Also, the Reserve Bank of India (RBI) has been resolving P2P lending issues by implementing a regulatory framework.
An Array of Government Schemes
The Government of India has launched several schemes to make it easier for SMEs to access credit on time. For instance, the Pradhan Mantri MUDRA Yojana (PMMY) enables enterprises from non-firm sectors to avail credit ranging from Rs 50 thousand to Rs 50 lakh under three schemes – Shishu, Tarun and Kishore. The entrepreneurs can use MUDRA loans for both starting a new business and expanding an existing business. They can even apply for the MUDRA loans through various lending institutions. Likewise, the Government of India has collaborated with the Small Industries Development Bank of India (SIDBI) to provide unsecured working capital loans up to Rs 100 lakh to SMEs under the schemes. Many enterprises opt for these schemes to avail credit at lower interest rates.
On the whole, digitization and fintech enable lending institutions in India to switch from conventional lending models to technology-driven lending models. Most lending institutions nowadays allow borrowers to compare various business loan products and apply for a business loan through their websites. They even leverage financial technologies to speed up business loan processing and disbursement. The constant growth of SME lending market makes it easier for SMEs to avail credit on time while negotiating for favourable terms of lending.