How Technology is Helping Overcome Barriers for MSME Lending

India has secured the coveted milestone of digital payments worth ₹4 lakh crore a month in December 2020 due to the collective intent and concerted efforts from multiple corners. Indeed, the country's fintech revolution is in stride. Nevertheless, besides elation, the moment is also one of introspection on whether a large segment of the nation's unfunded and underserved are still left to meet the current growth demands with financial products from the past. The emergence of fintech in India is a rare opportunity to meaningfully address the credit conundrum in the MSME sector, constituting nearly one-third of its GDP and providing sustenance for its teeming millions.

Despite their strategic economic significance, MSMEs worldwide receive a disproportionate share of the credit focus. This IFC study estimates that 40% of the MSME businesses across the Global South manifest an unmet financing need of $5.2 trillion or 1.4 times the available volume of MSME credit. In India, with its many MSMEs operating in the unorganized sector, characterized by high information asymmetry and low to moderate financial literacy, the situation is no different. RBI reports that the MSME segment benefits from only around 25% of the total lending exposure in the country, leading to a colossal credit gap of $240 billion. Business disruptions due to the pandemic and resulting liquidity crunch has only compounded the crisis.     

However, as the dust settles down in the New Normal, hope finally dawns over the horizon. Digital lending platforms are gaining prominence in their steady attempt to bridge the funding chasm and redefine how Indian MSMEs gain access to credit. The evolution is fueled by the low customer acquisition cost incurred by the digital lending platforms, compared to their brick-and-mortar peers in banking, and an ability to leverage new-gen technologies like AI/ML and Big Data to fuel alternate credit risk assessment models for thin-file applicants or new-to-credit customers. The situation has been made further conducive by policy initiatives like UPI, Digi Locker, C-KYC, Digital KYC, GSTN, AePS, BBPS, and TreDs, setting the foundation of a robust digital lending ecosystem. 

It will not be an understatement to say that optimum access to data, both financial and otherwise, in a ready-to-consume digital format is key to sustaining the pace of MSME lending transformation. It is pivotal for the diversification of the MSME lending products, incorporating innovative features like instant approvals, flexible repayment tenors, quick settlement, P2P contracts, and an overall shift of the lending practices towards an end-to-end, straight-through processing and disbursement model. It is the unhindered access to high-quality MSME data that empowers lenders to explore radical concepts like credit approvals based on pre-qualified customer profiles, build paperless transaction solutions using IndiaStack APIs, or even use surrogate data and Machine Learning models to assess the borrower's willingness to pay in the absence of conventional credit scoring metrics. 

Here, it is pertinent to mention the RBI-driven Account Aggregator Framework, in line with the recommendations of the Data Protection Committee Report under the Chairmanship of Justice B.N. Srikrishna. Currently, the data ecosystem in India that the banks and financial instructions access for underwriting MSME credit is highly fragmented, pushing up the approval turnarounds and the total cost of lending. Now, with Account Aggregators acting as intermediaries to control data flow, the proposed framework is poised to further streamline MSME lending by allowing financial institutions to access the required datasets on demand. As Financial Information Users (FIUs), they can pull the relevant data sets from the designated Financial Information Providers, using the framework to evaluate the creditworthiness of an MSME applicant. 

Equally important is the easy availability of the standardized GST-linked data to the digital lenders. Giving a first-hand account of the cash-flow performance of an MSME borrower, GST data forms a reliable basis for the issuing of credit at surprisingly low customer acquisition and processing costs. 

The free flow of data and the right tech is not only contributing to cost management but also to the orchestration of an end-to-end onboarding journey with customer experience at the center. For instance, KYC through physical verification has been posing a considerable drag on service delivery. But now, fintech can develop no-contact customer onboarding solutions within the RBI's updated Video KYC guidelines to simplify customer acquisition further. It can be built upon by KYC universalization so that a lender can directly pull from a central KYC database instead of executing the process at their end for an MSME borrower. 

Despite these successes, patches of concern continue to exist. For instance, rogue lending apps that use technology stacks with controversial origins. They jeopardize the confidentiality of customer data and can potentially lock the borrowers into insidious debt traps, among other complications. On the one hand, the existence and proliferation of such applications risk an erosion of customer trust. On the other hand, they may draw overly harsh regulatory responses, stalling bonafide innovation in the sector. 

Nevertheless, opening digital lending for the Indian MSMEs is an idea which has taken off. Much rests on the stakeholders across the technology and the policy lobby to cash on this lucrative opportunity and steer the revolution in ways that best serve the core MSME interests in this country, demonstrating tangible outcomes.