Digital Lending and Its Impact on SMEs in India

Rajath Kumar

The growing entrepreneurship and start-up culture in India has increased the demand for flexible business loans to support such new ventures monetarily. However, funds that come through banks, government agencies and other financial institutions are not always easy to procure. The detailed paperwork, the long waiting times to get approval for the required amounts, and the high interest rates to be paid over an extended period deter many new businesses from approaching the conventional sources of working capital.

Propelled by technological developments, an alternative source of loans for small business has emerged in the form of new FinTech (financial technology) lending. In India, the FinTech market has witnessed a period of rapid growth in the last two years. As per reports by KPMG India and NASSCOM, it is expected to cross the $2.4 billion mark by 2020. Its lending model is driven by digital technology and is inherently different from the conventional approach that has been used by banks for years.

Most FinTech lenders specialise in micro financing and SME lending. The loan is granted promptly based on financial statements, bank transaction history and e-commerce transaction behaviour where applicable. As a leading player in the digital lending industry, Capital Float has already carved out its niche and is trusted by entrepreneurs who need quick loans to materialise the innovations in their business plans.

Why are SMEs shifting from conventional sources of finance to FinTech lenders? 

Credit underwriting has been a major challenge with regards to the SME sector. The loan officers in Indian banks still use outdated methods to determine the creditworthiness of a small business. Furthermore, the loans offered by banks are secured in nature, those that require the borrower to offer some collateral – such as real estate, gold, investment portfolio, machinery or stocks – as security. This prevents several enterprising ventures from availing finance even if they have good prospects to grow and the ability to pay back their small business loan on time.

A digital SME loan is comparatively easier to obtain. The FinTech lending structure is backed by the assessment of digitally uploaded documents. The creditworthiness is evaluated using big data, psychometric questionnaires and social media behaviour, in addition to the trading position of the concerned business. If the SME does not maintain a formal balance sheet, alternate documents throwing light on its prospects in the industry can be used to determine the creditworthiness.

The experience of procuring loans before the advent of FinTech revolution was not very customer-friendly. Borrowers had to fill in long paper-based forms, gather many documents in support of their applications and pledge an asset to the lender. Subsequently, there was a waiting period running into weeks before the small business loan amount was approved.

Digital lending companies have improved the user experience by leveraging technology to tone down the paper work and processing time. Just like retail shopping and online travel bookings, the capital market for SMEs also needed to evolve and move online.

Was there a need for this new source of small business loans? 

The emergence of FinTech sector for lending to small and micro enterprises is not only limited to India, but is a global phenomenon. An article published by Forbes has comprehensively analysed the case for this new source of business loans. The financial crisis of 2008 had left the banking sector with almost no scope for innovation. They were heavily regulated by new rules for lending and were urged to limit their risk by demanding for liquid collateral and Tier 1 capital. They also had to be more attentive than before to their back offices and compliance management.

Such changes encouraged finance-savvy and customer-focused talent pools to devise new ways, whereby technology could be leveraged to make borrowing easier. Digital lending services build a bridge between lenders and borrowers. There is a difference in the time taken to process the application, the underwriting process, the actual disbursal of the amount and the period for which the SME loan is granted. While adequate care is taken in evaluating the eligibility of a business for the grant, a FinTech company also ensures that there are no superfluous delays.

In line with the standards established by banks, an online lender must also ensure a high degree of transparency in the process of granting loans. At Capital Float, before a transaction becomes active, borrowers receive complete information on the rate of interest, the tenure of loan and any condition attached to the deal. There are no unpleasant surprises at the time of loan repayment.

Another advantage of procuring unsecured loans from a digital lender is that this new industry can adjust to changes more actively than conventional banks. With lower costs of underwriting using technology, lower rates of interest also become feasible.

Digital lending is helping a new class of business borrowers who have not been able to obtain funding from traditional sources. With an automated underwriting process and risk management, it has a lower operational cost and smoother loan processing. A major  of FinTech-based lending is the assessment of client’s credit worthiness. Unlike banks that use only income statements and formal credit history, a FinTech company gathers substantial data through social media and big data. What’s more, with a strong use of technology in lending, the focus on safety is also uncompromising. There are adequate measures to keep the customer details encrypted and secure. Moreover, they also facilitate tailored finance products keeping in mind the varying needs of different industry segments.

The underlying objective is to support promising entrepreneurs in getting quick funds and realise their new business ideas. Capital Float believes that SMEs can grow consistently if they have secure and quick access to funds. As the government continues to promote digital transactions through e-wallets, mobile-driven point of sale (POS) and Internet banking, the financial structure must also be modernised to give a further impetus to entrepreneurship and the ‘Make in India’ vision.

As a FinTech company, Capital Float has created a business model that is not limited by structural formalities surrounding banks and traditional lending agencies. Our aim is to serve client needs efficiently and help promising businesses flourish progressively.