How fintech in India is changing the landscape for SME lending

Sunil Param : Head of Content and Communications at Pine Labs

By Sunil Param | April 03, 2020

Sunil Param is the Head of Content and Communications at Pine Labs.

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SMEs and MSMEs are a major yet overlooked drivers of the national economy. A whopping 38% of GDP in India is contributed by MSME, and yet only 10% of small businesses have access to formal credit1. What the sector today needs is an urgent liquidity injection. This is because despite generating massive employment at a low capital cost, SMEs and MSMEs are facing an ever-widening $240 billion gap. So far, conventional financial institutions have been unable to bridge this gap, having addressed the credit needs of less than a mere 5% of the market. Various factors such as complexity of SME finances, lengthy documentation, low scalability, and small loan ticket size have contributed to the problem.

This is where alternative lending platforms like fintechs are bridging the gap. The fintech sector is out to capture the towering potential of the unaddressed credit market, representing an opportunity of over USD 1 trillion by 20232. The credit models integrated by these fintech companies in association with banks and NBFCs is an automated repository of consumer credit scores based on utility, bank transactions, telecom, etc.

Role of fintech in SME lending

Through data analytics for example, fintech players have understood the various stages of the life cycle of SMEs & MSMEs - startup, evolution, maturity, restoration, and finally decline - and their monetary requirements that vary in each phase. Basis this understanding, the fintech lending industry is exploring alternate forms of lending such as PoS-based lending, P2P-based lending, invoice-based lending, and short-term lending.

Digital lending

Within the alternate lending space mushrooming, digital lending models are catering to the huge unfulfilled demand for credit. 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 20233. Agile processes, digitisation, lean organisations, and innovative business models are swiftly changing the digital credit market. It has the potential to be a game changer for SMEs as fintech working capital loan solutions are effective at a lower scale.

Mitigating risks of non-payment

It is interesting to see how fintech platforms are mitigating the risks that come with these business opportunities. Retail PoS and payment processors are usually a better option than banks to assess the risk of lending to small merchants. Credit providers gain visibility in the daily transactions of a merchant. The collection process is facilitated substantially, since flexible repayments automatically get processed by the systems. Whereas, for merchants, this tech-driven process is convenient due to integrated payment gateway integrations. A contractual relationship is in place for further ease of extending credit quickly and efficiently. With many fintech lending firms, the time gap between loan application and funds pay-out is sometimes as few as only two to three business days.

Empowering merchants through technology

A classic example of an alternative credit lending platform is Pine Labs. We are a full-stack merchant platform offering a blend of technology and capital. At Pine Labs, we help businesses to expand their footprints by offering collateral-free business loans. We have opened the credit seeking route to the over 150,000 merchants across industries in our network and encouraged them to seek working capital loans from a wide network of our NBFC partners. Our platform delivers collateral-free quick loan disbursals with minimum documentation. Catering to the specific needs of SMEs, we offer long-term and short-term loans with flexible repayment options to merchants - which they can apply for via our website and myPlutus app.

With our customised and tech-based lending offerings, we aim to create a win-win situation for merchants so they are able to deliver exceptional experience to their consumers. After all, the better the customer experience, the more the business growth!

1 PwC - A wider circle

2 PwC - A wider circle

3 PwC - A wider circle