There are over 63 million micro, small, and medium size enterprises (MSMEs) that operate out of India ,that are generating multiple employment avenues and contributing to India’s GDP significantly. Despite their key involvement in the nation’s growth, they are unable to realise their true potential due to the limited access to credit. Even today, almost 40% of the MSME’s credit requirement is met by informal sources . This inadequately served market offers a great potential for lenders, digital banks and NBFCs to cater to this segment through tailor-made innovative and digitized lending opportunities. Digital lending can transform the MSME landscape into a more formalised and structured one, driving it to disruption.
How can digital lending help empower small businesses?
A recent report published by Niti Aayog titled ‘Connected Commerce: Creating a Roadmap for a Digitally Inclusive Bharat’ concludes that digital lending has some intrinsic advantages over the traditional lending model. Some these advantages include faster loan approval, using alternative data to determine creditworthiness, and cost effective operations.
Risk Free Liquidity - Digitization offers risk free liquidity to borrowers and creditors in the MSME sector. The adoption of technology by banks and the increasingly developing fintech sector in India are streamlining and digitizing every step in the lending value chain to address the credit accessibility risks and challenges.
Increased credit flow - There can be a significant increase in credit flow to financially disadvantaged businesses, new credit clients and informal borrowers. A digitized lending model makes this possible by eliminating human prejudices and bureaucratic limitations, and by leveraging borrower statistics to gauge their credit scores, approve loans, disburse funds and collect EMIs.
Faster Loan Approval - Traditional onboarding of entrepreneurs takes almost a week and requires the borrower be physically present. For businesses in remote areas, this becomes a lengthy and cumbersome process. Digitized platforms such as video-based KYC enable fast-track registration and compliance procedures; furthermore, advanced facial recognition techniques and image forensics, speed the verification process without the actual presence of the borrower and limited or no paperwork.
Using alternate sources of data for determining credit worthiness - Some of the MSME owners may not have an official credit history; in these cases, other sources of data such as cash flows, transactional information and behavioural data can substitutethe standard information required to underwrite loans. Alternative data such as GST returns, sales records, receivables and invoices can be collected by artificial intelligence and machine learning algorithms to determine financial soundness. Such advanced digital lending models only become more proficient in determining credit delinquency rates, with the increasing accounting data that they collect and evaluate. These technologies self-learn through data computation and are capable of detecting red flags, inconsistent patterns and so on to ensure the loans being underwritten are free from risk.
Banks like IDFC FIRST Bank, help meet diverse financial needs by providing various avenues of credit accessibility such as Vyapaar Vriddhi Loan for MSMEs, IDFC First Personal Loan for private requirement and Sakhi Shakti Loan for women. The IDFC Loan reviews explicitly mention their easy accessibility to credit and pocket friendly interest rates. So, if you are a small business owner, a woman entrepreneur or just looking for a personal loan, apply through IDFC FIRST Bank to realise your goals.
Final Words
Data is wealth. The plethora of data that is generated in today’s day and age can play a contributory role to narrow the credit gap for small businesses and offer a platform to merchants for easy accessibility to complex financial services. Through evaluation of alternative data, small businesses get an entry into the formal credit ecosystem and with short-term credit options they can build a credit history over time. With access to technologically enabled credit avenues to small businesses, the MSME contribution can be augmented playing a key role in the overall economic growth of the country.
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Being a salaried employee, it can be easier to get the loan approved showing the income proof, but when it comes to a self-employed individual, people believe that it can be difficult to get a loan sanctioned.
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Eligibility Criteria: The borrower should be a resident of India between the age 18 - 65 yearsThe annual turnover or profit has to be 1 lakh or as per the requirement of the lenderThe borrower has to be in the same business for at least 3 years or moreDocuments Required:Proof of age - Birth certificate/passport/PAN cardProof of ID - Voter ID/Passport/Aadhar/PANPhotographsProof of residence - passport/utility billLast 3 months bank statementProof of income - Latest income tax return, the balance sheet of last 2 years, profit/loss certificateCheck with the lender if you need to submit any other documents.
