Digital Lending to SMEs

Financing for small-and-medium enterprises (SMEs) has traditionally been limited to businesses with strong cash-flows or assets.  Businesses that did not fit into the traditional credit-underwriting framework found themselves shut-out from traditional credit markets, i.e. Banks and NBFCs.  This practice is now fast changing with the advent of numerous start-ups that are leveraging technology and alternate data sources to underwrite.  This new sector—technology-enabled SME lending—is attracting millions of dollars in capital from the investor community.

Estimates indicate that 90+% of SMEs do not have access to financing, 5% obtain financing from institutional sources and ~2% from non-institutional sources.  Banks tend to cater to established asset-heavy businesses with solid balance sheets and financial history.  SMEs lag in this aspect as India is primarily a services economy. Most SMEs operate in the services sector, which by nature makes them asset-light. As a result, Finance for SMEs in India is a widely discussed subject, but very little action has been taken in this space..

Leveraging Technology

Financial Technology, i.e. FinTech, is a hot segment for investors. As per sources, investment in the segment grew by 176 percent from 2010 to 2014.  Startups have a real opportunity to build a solid credit business in different parts of the value chain: credit sourcing, risk scoring, pricing, fulfillment, collections, compliance, risk management, better pricing, and NPAs, etc. The SME market in particular does not get anywhere close to the amount of debt that they require to fuel growth. There is a high degree of friction in the process today.  The sector is seeing interest from major public and private banks. These banks are open to partner with startups in order to gain a technological edge in their processes. Another aspect is that the marketplace itself is evolving: herein the provider enters into agreements with multiple financial institutions- who are in turn providers of wholesale capital to the lending platforms.  These platforms help SMEs raise loans for amounts ranging from INR 100k to 10mm.  The change catalyst for an emerging marketplace is technology- that is transforming the credit-decisioning process, reducing documentation, rounds of meetings, and time.  As an example, one digital-lending platform reviews over 2,000 data-points to determine credit worthiness.  Data is drawn from multiple locations including, social media, bureau records, and vendor relationships, etc.

Resultant Talent Swing

We believe the fuelling of credit demand from SMEs, and the resultant explosion of digital-lending will skew the talent scenario in a very fundamental way.  To start with- the boundaries between finance and technology are getting increasingly blurred.  To succeed in a digital-lending business will perforce call for executives who are well versed in the fundamentals of lending, understand the power of digital and technology, and who have come face-to-face with the realities of SMEs in India.

The demand for such executives will be partially met from the talent within the priority-lending departments of the commercial banks.  Talent from the technology-providers to Banks will also be another source.  Finally, the traditional credit-decisioning providers such as the credit-bureaus will also be a font of talent for the emerging digital lending platforms.  Within the nascent sector the roles which will be pivotal will be the technology & business architect, the institutional relationship manager, and the digital-marketing leader.



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