Gaurav Anand
Over the past fifty years, SMEs have been the powering the Indian economy, especially in urban and semi-urban areas. They contribute around a third of the GDP and about 63% of all employment. India has more than 50 Million SMEs, reckoning for 38% of GDP. Despite contributing a big share of GDP, they often struggle to get adequate financial support from government agencies, financial institutions, and banks. Customizing services in a cost-efficient way for SMEs has been an uphill task for formal lenders. In India, barely 10% of SMEs have access to formal credit generating operational issues for them. Structural barriers, including information asymmetries, lack of credentials to avail funding from banks or other formal lenders, high transaction cost, cumbersome processes impact the competitiveness and growth prospects of SMEs. Currently, SME unmet lending requirements of 5% in India could be a $ 15 Bn opportunity. The economic system has liquidity, but formal lending institutions do not have the risk management framework to enable lending to these firms. This is where Fintech solutions come in. With the technology-driven solutions, Fintech has made the loan process hassle-free and efficient for small and medium enterprises.
How does the fintech process works?
The development of mobile business management solutions by fintech using machine learning and the latest artificial intelligence has made the process convenient and efficient. SMEs connect to apps, accounting software, facilitating effective identity verification, onboarding, and validation ensuring quick access to loans to them. It also ensures fulfillment of regulatory requirements remotely, ensuring a check on fraudsters from capitalizing. The process enables the deployment of loans within a few hours.
Traditional Lending System
The traditional lending model has drawbacks in terms of lacking access to credit for SMEs as small business owners barely have collateral against which they can borrow. Banks have faced the challenge of a comprehensive assessment of risk in lending loans to SMEs and therefore have stayed with their long tail process of the lengthy risk assessment cycle making the structure cumbersome and time-consuming
The growing Fintech companies are aware of the limitations of the traditional system. They have sought financing to SMEs for two key reasons- managing day-to-day liquidity and addressing expansion needs. They have entered into the market offering targeted solutions to these issues for both Banks and SMEs by advanced analytics and the use of artificial intelligence. Earlier poor credit scores and peer-to-peer marketplace made it unable to score loans by SMEs. Now, fintech lenders have gained a much deeper understanding of SMEs requirement establishing easy risk assessment, and sanctioning loans in less than 24 hours. Today, even banks are turning towards Fintech for SaaS solutions. It works as a third-party engagement for a streamlined and digital mobile delivery. E-commerce, bill payments, online transaction have all been incorporated with the help of Fintech companies.
Traditionally, getting a loan approval meant a lot of hassle. Fintech has revolutionized this process completely. With new innovative, artificial intelligence-led solutions, SME financing needs are better positioned unlocking their potential and leading them out of the financial crisis.
Here’s how Fintech supports SMEs in terms of financing.
Customer-oriented approach
The new approach is integrating banks with Fintech companies. It creates a win-win partnership with reliable customer service. The continuous innovations are focusing on efficient and convenient methods with maximum security.
Fast and simple
Advanced and high-growth SMEs cannot always rely on bank credit. In particular, alternative finance is needed by them to transform their activities, such as a change in ownership or expansion into new markets. Also, banks take time to assess and lend the money hampering the growth of fast-paced SMEs in need of instant funds to run their business.
Solution for many problems
SMEs find it tough to identify the optimal asset combination that would help achieve the desired result to get the loan without collaterals. Fintech companies can help with the offers of unsecured loans, building an optimal asset for secured loans, and also an accurate assessment of the creditworthiness of SMEs basis their transaction history. Further, they provide fast delivery, remote availability, complete access to the records, and instant approval methods. The flexibility in payment options also encourages consumers to choose Fintech over banks.
Secure user authentication and Digitalization
With vigorous processes, digitization, and innovative business models, the digital credit market is changing swiftly. According to a 2019 PwC report, the Indian digital credit market will experience a 36% CAGR growth – from USD 75 billion to USD 350 billion – by 2023. The use of technology such as cloud-based assessment, digital payments, automated invoicing, and instant settlement processes. Has enhanced productivity and lowered the operational cost for fintech. This enables them to provide customized working capital loan solutions to SMEs at a lower scale. Fintech companies also ensure double authentication and multiple data locking systems to regulate access to and prevent any misuse of information.
Final thoughts
By leveraging digital onboarding, Fintech provides the solution for the credit woes of SMEs. They have enabled an environment of improved trust between and lender and borrower and in turn, have improved the risk-taking appetite of the market. The convenience of applying for loans from anywhere is an incentive for SMEs. Transparency of processes, no hidden cost involved, and stress-free debt procurement norms have created a larger user base by addressing connectivity hurdles and promoting customer literacy.
