By Mayur Modi
Credit and financing for MSMEs:
Be it individuals or institutions, everyone goes through a financial crisis at one time or another. According to WBG-Intellecap estimates in 2017, demand for addressable credit from MSMEs in India was pegged at INR 36.7 trillion. At INR 10.9 trillion, however, the overall supply from formal lenders remains insufficient to meet this demand.
According to supply and demand estimates, banks and other traditional financial players are unable to fill a huge credit gap of INR 25.8 trillion. One of the biggest hurdles affecting supply is the lack of credit history and proper business documentation.
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Benefiting the unbanked and underserved
In such a scenario, expansion avenues are created for digital lending players and new age NBFCs. As banks and other traditional lenders are hesitant to serve those without a proper credit history, digital lending platforms are eagerly stepping in to fill the void through an innovative business model and deployment of technology.
Despite all the efforts made by the Government of India to ensure that financial services reach all people in the country through the Pradhan Mantri Jan Dhan Yojana, Pradhan Mantri MUDRA Yojana and other systems, millions of individuals and businesses continue to bypass the formal banking system. One of the biggest barriers to accepting credit has been the reluctance of traditional lenders to lend to those with no credit history or low credit scores. Regardless of whether a loan applicant was employed or self-employed, there was no way for him to qualify for a loan in the event of a financial emergency. Consequently, they could only support themselves by borrowing funds from family and friends or fell prey to loan sharks.
But new-age fintech companies are now deploying technological tools and techniques to reach out to unbanked and underserved cohorts, solving financial problems through transparent, fast, affordable and convenient lending options. Their efforts have seen the lending system evolve from a purely physical realm to a hybrid banking model that includes both digital and conventional modes and utilizes both alternative financial and non-financial data points for credit underwriting.
In this process, digital lenders are benefiting from tailwinds that have accelerated the adoption of digital offerings by the masses, overcoming their initial reluctance. The push to digital has gained momentum through demonetization, the introduction of GST and social distancing norms enforced during the nationwide post-pandemic lockdown of March 2020.
All these factors have created a conducive environment for new age lenders to expand their reach across India. As a result, the field of digital lending in India is expected to grow from $110 billion in 2019 to $350 billion in 2023. One of the biggest offerings from digital lenders is the provision of instant personal loans, which has made l easier, faster and hassle-free access to credit. -free by overcoming the hurdles that borrowers face with banks and other conventional lenders. From small loans to big financing, fintech companies are making it all a reality for cash-strapped individuals and businesses.
Range of benefits with digital tools
From receipt of the loan application to due diligence, processing, approval and disbursement of the amount, digital tools have transformed the process of obtaining emergency financing. The first tool that contributes to this transparent process is the use of alternative means to undertake due diligence by leveraging unconventional credit data. For example, shopping habits, social media crawling, digital transaction data such as NEFT, IMPS, RTGS and UPI, credit history if any, etc. all shed light on the creditworthiness of potential borrowers. Digital risk assessment techniques eliminate the need for physical documentation, simplifying and streamlining the underwriting process.
Once loans are disbursed, advanced technology tools that use artificial intelligence, machine learning and big data analytics help improve collection levels and minimize defaults. For example, periodic email and SMS reminders ensure that customers maintain sufficient balance in their bank accounts before the repayment due date. Therefore, EMI bounce rates are minimal. Operational costs for new-era lenders are also minimized through the use of third-party data and digital trail analytics – an area where traditional lenders incur additional expense.
Providing such loans to those who have no credit history not only brings immediate relief during a financial crisis but also helps them build their credit history as early borrowers. Through this, these people then become eligible even for long-term and expensive loans in the future.
Furthermore, digital lenders do not directly compete with banks, but rather complement them by extending credit to those who are not eligible for loans from traditional lenders. This is especially true for small, short-term loans that banks typically don’t offer.
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Funding needs may relate to business or personal emergencies. Either way, instant loans can be used for a variety of purposes such as working capital needs for a business or for personal purposes: home renovation, vehicle purchase, education expenses , purchase of real estate, etc. Especially in the event of a medical emergency or other crisis. when funds are needed in the short term, instant personal loans can make a big difference as they could be sanctioned and disbursed within hours of submitting an application.
By providing instant loan approvals with flexible tenures through fully digital transactions in crisis and non-crisis situations, digital lenders are truly enabling the goal of faster financial inclusion across India.
Mayur Modi is the co-founder and co-CEO of Moneyboxx. The opinions expressed are those of the author.