Free Flow Of Credit For SMEs And Unleashing Growth

Small and Medium Enterprises (SMEs) are the backbone of India's growing economy, one of the fastest growing major economies in the world. Cited as the major drivers of economic growth & job creation, SMEs contribute approximately 29% to India's GDP. According to the latest 2017-18 annual report released by Government of India's Ministry of MSME, there are an estimated 63.4 million Micro and SMEs in India. Out of these, 19.7 million were in manufacturing, 23 million in trade, and 20.7 million in other services, and they collectively employ an estimated 111 million people, so the numbers are very significant.
 
Despite the large numbers, the SME sector is very diverse and unstructured. As we all know, business requires capital to grow and expand. Most SME businesses are started on a shoe string budget and struggle to access credit for working capital financing from established credit providers like banks and NBFCs. This lack of credit in the Indian SME ecosystem, conservatively estimated at a $300 billion gap, is one of the biggest limiter of growth for small business. When SMEs fail to secure financing from regulated lenders, they are forced to borrow from unregulated sources at unfavourable and non-competitive terms, which lead to growth being stymie.

The other big limiter of growth for SMEs is the lack of use of automation tools like accounting software and digital payments in receiving and making payments. Lack of documented business history, accounts, and payments is a leading cause for regulated lenders to reject SME loan applications or drag decision making. The one's that accept applications struggle to properly evaluate the credit worthiness of a business and assign risk, which leads to longer than average decision cycles with similar results.  

The need, therefore, is to build innovative ways to enable credit for SMEs and encourage the flow of credit to them so as to power this very important sector of the economy. This will require a multi-pronged approach from the local, state, and national government, trade associations, and financial industry and Fintech providers.

Banking on Fintech
Innovation tends to challenge and sometimes displace traditional sectors and practices. While the last three decades of financial innovation has already led to massive changes in how financial services are delivered and consumed. Think of how debit cards, mobile wallets, mobile banking, and ATMs have transformed our lives in just the last few years. The pace of innovation in terms of fintech will only accelerate and it will continue to transform our lives and businesses.
 
Fintech will also help resolve many bottlenecks in financing and access to credit that people and businesses face. There will be newer and more efficient ways to apply for loans for consumers and businesses. We are already seeing examples in the eCommerce industry where consumers can opt for EMI payment options at checkout. The SME loan application, and for that matter any business loan application, requires higher levels of scrutiny and additional data, but I am confident that the application process can be greatly shortened and automated.

Also with the combination of automation software, payments data, digital records, social data, and using Artificial Intelligence and machine leaning tools, the credit evaluation of SMEs can be conducted differently and more efficiently. The right combination of technology and data can help bridge the gap between SMEs and lenders.

Lowering the Cost of Borrowing
When more SMEs have access to credit from regulated lenders, and it is available in a timely manner, it will provide a tremendous cost savings to the SME. The cost of borrowing for SMEs will be reduced significantly as they will no longer have to rely on unregulated lenders that use predatory and extremely high interest rates for short term loans.  

Also, the greater digital footprint of SMEs will lead to a proliferation of technology-focused alternative SME lenders using the treasure trove of digital data. These alternative lenders will be able to focus on new data and analytics to decrease costs associated with loan origination and collection, showing the profitability of the SME market. This in turn will lead to additional capital and lenders coming into the SME space, and further reducing the cost of borrowing for SMEs.

The Bottom Line
It is important for SMEs to automate their books and payments. It will help them in accessing credit, lower their cost of borrowing, and fuel growth. Banks and NBFCs need to look at newer ways of evaluating SME credit, with the help of Fintech providers. Government needs to continue encouraging and supporting the increased flow of credit to the SME industry, which is the untapped growth engine of the Indian economy.