According to an IFC report, SMEs hold a tiny 6-7% credit share and face a credit deficit of nearly $ 1.1 trillion. The gap can be attributed to systemic challenges such as reliance on credit history and lack of awareness of digital lending solutions. Credit scarcity is only met by formal lenders 40% of the time due to difficulty in assessing MSME creditworthiness due to lack of credit history and preference for collateral over cash flows. Treasury. It is a vicious cycle as MSMEs cannot create a credit history due to the lack of formal loans. Insufficient data not only excludes creditworthy MSMEs, but also makes them expensive. With banks serving large enterprises and microfinance catering to production needs at the bottom of the pyramid, middle MSMEs have largely lacked access to solid sources of capital.
Targeted government policy interventions such as the automatic FDI route, the Micro and Small Business Credit Guarantee Trust Fund (CGTMSE), the Credit Linked Capital Grant for Technological Modernization (CLCSS), the development of clusters of micro and small enterprises (MSE-CDP), the fund program for the regeneration of traditional industries (SFURTI), the program for the promotion of innovation, rural industries and entrepreneurship (ASPIRE) have closed the gap, albeit marginally.
The Age of Data and Technology-Driven Small Business Platforms
Most of the credit gap will need to be addressed through structural and market-based solutions. Emerging startups largely enable credit on three fronts: digital / phygital delivery engine, creating alternative datasets for underwriting and lending / co-lending as well as traditional lenders to MSMEs (NTC / Thin Credit & Banking ). These fintechs use technology to eliminate market inefficiencies, making access to credit faster, cheaper and more contextual for MSMEs. The multiple approaches include online lending platforms / credit underwriting platforms, supply chain finance (SCF) platform, integrated finance solutions and revenue-based finance platforms.
Online lending platforms have been around for quite some time now and have undoubtedly created a huge impact on MSMEs – Lendingkart, Indifi, Neogrowth, SMECorner, etc. . Most of these platforms have used alternative data and AI to underwrite and lend to MSMEs.
Another interesting approach to lending to MSMEs is to take advantage of the anchor ecosystem (large companies / brands), this is where supply chain platforms have a role – companies like Vayana Network , Credable, Canopi, etc. single platform. Usually these platforms come with multiple integrations (ERP / Accounting / GST) and have deeper access to data which is not generally available to banks in real time or otherwise.
When it comes to data, cloud-based digital bookkeeping and accounting software startups like Khatabook, OkCredit, Hostbooks, etc. not only provide relevant and affordable accounting / compliance solutions, but also rely on rich structured and unstructured data (GST) which will open up a plethora of opportunities to enable credit, especially for micro businesses. Government pressure for the digitization of MSMEs and the need for compliance are contributing to the cause and adoption of such solutions.
Another interesting phenomenon that is revolutionizing the financing of MSMEs is integrated finance (EF) which integrates financial services into non-financial ecosystems (NFEs). EF startups, like UPI, are creating a standardized Unified Credit Interface (UCI) on top of transactional / super platforms / brands. In addition, they reduce time to market, overall total cost of ownership, allow NFEs to create personalized products specific to their user cohorts; and all this on an opex model, that is to say without deploying engineering teams, portfolio tests, workflows, analyzes, etc. EF startups come with a set of plug & play integrations that upgrade legacy systems from traditional lenders and therefore their ability to distribute their products across new age ecosystems. Integrated finance is potentially a $ 7 trillion market.
Within integrated finance that is catching up like wildfire, there is the Buy Now Pay Later (BNPL) model which allows MSMEs to buy on credit that otherwise would have difficulty obtaining financing. BNPL may become the fastest growing payment option for B2B ecommerce setups like Flipkart Wholesale, Walmart, Tata Business Hub, Metro, etc. BNPLs are expected to represent more than 50% of integrated financial income by 2026.
Another avenue of credit is through income-based funding platforms; it works for D2C brands and SaaS businesses with lower consumption and / or predictable cash flow, but looking for a seamless credit on demand experience. Startups like Recur, Velocity, Getvantage, etc. have embarked on this path by creating a platform for this and focusing on creating a seamless credit experience for MSMEs.
We believe that integrated financial infrastructure and solutions with deeper integration within the MSME ecosystem will create the next big wave in the SME lending space. Thus, creating a paradigm shift in the MSME lending space, moving from rigid asset-based financing to personalized / contextualized financing solutions based on cash flow / transactions.
The author is Managing Director of Merisis Advisors. Anuj Mehta (director) and Jinsey Jose (partner) of Merisis Advisors contributed to this article.
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