Micro, small and medium-sized enterprises account for more than 80% of total industrial enterprises, employ around 117 million people and contribute more than 40% to manufacturing production and exports, according to a report by world Bank. Statistics highlight the importance of providing inclusive economic growth for MSMEs.
The report states that one million people enter the labor market in India every month. The fate of most of them will depend on the potential of MSMEs which are often presented as having the capacity to fuel wage employment and entrepreneurship. However, inadequate access to finance prevents small businesses from growing, competing and creating jobs.
Since SMEs contribute to the country’s economic growth, meeting their financial needs is no longer a necessity but is crucial for banks. In addition, small businesses are an important customer segment that banks cannot afford to lose to other SME lenders. The restructuring of lending activity to SMEs has now become an urgent need for banks.
Why is obtaining a loan a challenge for SMEs?
Expensive ways to obtain credit, complicated procedures that legacy institutions still cling to, asymmetry of information, lack of documents proving creditworthiness, and lack of knowledge of existing products and services are some of the factors. main reasons. When it comes to addressing the lack of accessibility to credit using cutting edge technology, conventional and traditional banks have yet to step up compared to new era fintech startups and alternative lending platforms.
Borrowing money becomes more difficult for small businesses when they are unable to present themselves as large businesses with long term goals, diversified businesses and strong financial structures. All of these factors fuel the lack of transparency regarding creditworthiness and lead small businesses to rely heavily on informal sources of credit.
Most of the time, banks find it difficult to view SME loans as a low risk proposition due to the higher default rate (due to lack of documents on balance sheet, credit rating, cash flow , income statements, operating performance, etc.) Initially, SMEs are faced with time constraints, and going to several banks for a loan and waiting weeks for loan approval add to their stress. Even if the banks would agree to disburse the loan, the entire cycle – from the paperwork of loan origination to loan approval – is a tedious and time-consuming task.
The timely and adequate injection of capital is crucial for SMEs to avoid obstacles to their growth trajectory, especially in the initial and growth phases. Due to the heterogeneous nature of small businesses, banks find it difficult to set standards in terms of loan valuation. And most of the time, they are very reluctant to lend on the basis of a long-term relationship with the borrowers.
Manual data entry and collection using Excel sheets often results in fragmented data maintenance and takes longer to communicate a loan decision to borrowers. The lack of proper integration of the data management solution with the loan origination system makes the loan disbursement process unwieldy.
SME underwriting is an expensive and time consuming business for banks because the cost and underwriting process for all borrowers (regardless of size and value) is similar.
Restructuring of the SME lending activity
Choice of route embracing digitization with the introduction of an online loan application, an automated loan approval process and the creation of an online platform will help banks speed up the SME lending process. In addition, they should start offering personalized advice on banking products and services to small businesses and help them with various business issues.
To maintain existing relationships with potential SME customers, banks need to segment small businesses based on number of customers, company types and profiles, products, and credit history. Putting the same effort and the same time to assess all segments of SMEs could prompt banks to make a final lending decision.
The loan application assessment and review mechanism should be automated, saving credit analysts time, reducing the cost of the loan process, and streamlining the decision-making process. The integration of automated underwriting platforms will allow banks to gain a competitive advantage in the rapidly changing digital world.
Banks should reach out to early stage SMEs by providing value-added services, mentoring, advice and a support system. More than just financing, small businesses need business management tools and advice on how to spend working capital diligently.
The creation of an online platform with self-service capabilities such as a streamlined online application, document imaging, online credit rating and digital document exchange throughout the loan cycle will make the loan disbursement process much simpler and faster.
Small businesses often face multiple challenges at various stages of their financial growth and therefore seek tailored solutions. Remote virtual interaction with bank account managers can be a huge relief for small businesses (regardless of location). Banks can initiate such an interaction via online tools and allow SMEs to make appointments online.
A plethora of unstructured data is available in commercial bank accounts of SMEs, which can be leveraged using advanced technologies such as artificial intelligence, data analytics and big data tools to improve lending decision. and better assess the creditworthiness of borrowers.
Government initiatives: a ray of hope
Last year the Minister of Finance Arun Jaitley announced the launch of a new portal for accelerated loans for MSMEs. Banks under this initiative will approve loans up to Rs crore per hour without the requirements of physical branch visits by entrepreneurs. All they have to do is submit the GST and income tax details; the loan will be disbursed within eight days.
The Small Industries Development Bank of India (SIDBI) set up the portal with SBI, PNB, Bank of Baroda, Indian Bank and Vijaya Bank. SIDBI also offers unsecured SME loans up to Rs 1 crore. world Bank, with the aim of addressing the financial constraints of small businesses in India, approved a loan of $ 550 million in 2015. According to a World Bank report, the project also aims to support the development of innovative financial products for franchisees . The World Bank is also supporting SIDBI’s efforts to finance SMEs by providing a $ 500 million line of credit. The World Bank’s MSME project had, as of March 2017, disbursed loans of $ 265.38 million to MSMEs in India.
Similar to this program, the government has launched many such initiatives to provide financial assistance to SMEs such as Pradhan Mantra Mudra Yojana (PMMY), Credit Guarantee Trust Fund for Micro and Small Enterprises (CGTMSE), etc.
Maintaining a leadership position and becoming a game changer requires unlearning legacy practices and restructuring the SME lending business. In the world of digital and alternative loans, small businesses change banks very quickly for fast, personalized services that can support their growth at every stage of their business. With alternative SME lenders infusing innovation into all aspects of the SME lending lifecycle, banks cannot afford to take initiatives to close the credit gap among SMEs and need to improve the entire experience. throughout the loan cycle.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)