The role of MSMEs in promoting employment and entrepreneurial opportunities pan-India remains indubitable. The RBI Governor recently noted that MSMEs have become the growth engine of the economy, given their tremendous network of 63 million enterprises, contributing to around 30% of nominal GDP and 48% of exports.
But worldwide, MSMEs have been badly battered by the pandemic-related crisis. In India, however, MSMEs were already struggling during the past few years due to policy-related reforms such as the introduction of GST in July 2017 and Demonetisation in November 2016. As these disrupted business operations, liquidity issues plus lack of adequate and timely credit access hit MSME operations hard. For any business, big or small, credit is indispensable, without which normal operations are hampered.
Addressing Credit Barriers
Moreover, credit is imperative for economies to grow. Since the vast majority of MSME workers are semi-skilled or unskilled, adequate credit access helps MSMEs drive social and financial inclusion. But lack of access to funds has created a credit gap of approximately $240 billion for MSMEs.
Considering the wariness of legacy lenders to extend credit to MSMEs, especially due to their stressed condition during the pandemic, fintech companies are perceived favourably for serving MSMEs’ credit needs. The RBI Governor highlighted this, saying that as digital capabilities rise and connectivity becomes ubiquitous, technological innovations will swiftly and radically transform India’s economy. As a result, financial services will witness lesser information asymmetry, reduced credit risk and higher financial inclusion.
One way financial inclusion among MSMEs can be promoted is by nurturing a symbiotic equation between banks and digital NBFCs to create a winning proposition for all stakeholders. This is where the co-lending model facilitates the lending of credit by banks and registered NBFCs.
Significantly, both digital NBFCs or fintech companies and banks possess diverse strengths. By joining hands to leverage these strengths, fintech entities and banks could better serve MSMEs and other consumers. Through the co-lending model, a digital NBFC is allocated the task of sourcing loans. These are then jointly underwritten by both parties for disbursal in a 20:80 ratio, with a larger share held by banks.
In such a partnership, fintechs have robust last-mile connectivity, helping banks scale up without huge expenditure on physical branches. On the other hand, with their sound balance sheets, banks provide capital at costs that ensure credit remains affordable. Rather than being a zero-sum game for fintechs and banks, the symbiotic relationship serves both partners well. This offers MSMEs timely, affordable credit, aiding the agenda of speedy, sustainable economic growth as well as inclusive development.
Benefits of Co-lending
These advantages recently prompted the SBI chairman to state that his bank prefers the co-origination or co-lending model for handling MSMEs’ financial needs, instead of lending directly to them. The joint contribution of credit ascertains that the risks and rewards are also shared between both lenders while serving the unserved/underserved sections of the economy. This benefits banks because the fintech players possess the ability to process structured as well as unstructured financial data with a better understanding of the risk assessment. Thereafter, banks are more comfortable lending to MSMEs.
Some elaboration on the above benefits of collaboration in catering to MSMEs’ credit demand is in order. Aided by tech-enabled mechanisms and algorithms, fintech firms have a much lower customer acquisition cost. These are further reduced since they can partner with online marketplaces via their speed and agility. Conversely, banks typically run up higher acquisition costs since their branch-centric model primarily depends on physical presence, which requires higher operating expenses.
Besides, fintech companies facilitate greater customization of products with more flexibility as per borrowers’ needs from alternate data sourced through social media and deep tech integrations with digital partners. Additionally, their omni-channel presence and speedy processing times boost quicker customer acquisition. Borrowers can apply for loans through WhatsApp, Facebook or mobile apps from the safe confines of their home, securing approval within hours. What’s more, swift post-disbursal services and customer care are available through the convenience of digital.
Meanwhile, though digital lenders lack large cash reserves, partnerships with banks address this issue. The equation suits banks also as they cannot serve MSMEs efficiently due to traditional underwriting practices that prevent this. Lack of collateral is another major impediment preventing banks from lending to small businesses.
Yet, thanks to digital players and their prowess at undertaking due diligence of customers lacking proper credit history, MSMEs are being served in a cost-effective, speedy and inclusive manner. Thanks to the fintech firms, underbanked and unbanked segments of MSMEs are also benefitting. Buoyed by such partnerships, the objective of greater financial inclusion is likely to be realized in the coming years.
The author, Akash Anand, is Founder and Managing Director at DJT Corporation & Investments Pvt Ltd. The views expressed are personal
First Published: IST