In part 1 of the series, we saw how the Reserve Bank of India is recommending the government to rein in the fintech sector. In part two, we will see how MSMEs can overcome fintech hesitancy by going for the safer option - a bank-fintech collaboration.
For MSMEs, access to credit is one of the most formidable structural challenges, and there is a rampant trust deficit in the sector to avail formal sources of finance. Despite the country’s central bank designating MSME as a priority sector, with a recommended target of achieving 10% growth in the microenterprises, only 22% of credit needs of the entire sector is met through the banking system.
In this scenario, fintech has opened newer avenues of financing for beleaguered micro and small businesses - instant, paperless, unsecured, multi-sector loans tailormade for various needs (not just limited to working capital) that can be availed with few clicks of a mouse have emerged as a tantalising option.
Given the astonishing hunger for such online micro loans - more than half the loan portfolio of NBFCs are digital, we are now in a new era of fintech-bank collaborations - some of the notable ones include partnerships between DBS Bank and CredAble, Axis Bank and Ezetap, IDB andU GRO Capital, HDFC Bank-Paytm, and ICICI bank-Niyo, where both parties are bringing their relative strengths to cancel each other’s weaknesses and expand customer acquisition. MSMEs are turning out to be one of the most critical beneficiaries of such tie-ups.
With their high penetration through their branches across the country or even a state in the case of smaller ones, banks have a sound physical infrastructure and a steady set of loyal clientele. What they do not possess, however, is the agility to scale quickly - branches, after all, cannot be opened, staffed and filled with customers in a day.
Burdened by obsolete systems, banks may also be turning away potential small-scale customers because of their inability to simplify essential procedures like credit assessment, KYC, onboarding and underwriting.
Another area where banks struggle is being nimble enough to customise their offerings for the MSME segment - by treating the sector as a monolith, they are discouraging credit-worthy SMEs to look for other financing options, simply because they aren’t able to fulfill small, yet varied sector specific, life cycle specific credit needs.
On the other hand, NBFCs or fintech are able to bridge the credit gap through technology while simultaneously contributing to easing cash flow management through digitisation of SME ledgers. But, being relatively new, they lack the public trust in the traditional banking system. Further, as their core competency lies in evolving low-cost fintech products and services for high risk customers, their loan books are smaller. Therefore, they may lack the capital to scale, unless they partner with banks, who have a pre-existing nation-wide network.
The amalgamation of the two is a win-win for the MSME, who gets the best of both worlds. In case of a bank-NBFC tie-up, the partners enter into a co-origin loan agreement, where, fintech powered NBFC provides technology support as well as tasks, as per RBI rules, at least 20% share of the individual loans on their books. Take the example of the recent announcement by NBFC U-Gro Capital and the country’s largest public sector bank - the State Bank of India, where the two partners are set to disburse INR 500 Crores to the MSME sector by March 2022. Despite the challenges of the new rules of co-lending laid down by the RBI, the model is an improvement of the previous arrangement, where both the bank and the NBFC had to approve the loan together.
In the other scenario, such as the collaboration between Kotak Mahindra and fintech firm Creditas Solutions, the bank handles the capital while the fintech partner takes responsibility for providing a seamless experience, including risk assessment through proprietary models developed with AI and ML algorithms that tap multiple data sources. LendingKart, a leading NBFC for example, crunches several ‘non-traditional data points’ to arrive at a credit score - GST data, mobile data, product interaction data, social data for credit evaluation, quality lead scoring, and product interaction.
The bank-fintech collaboration therefore, is the fulcrum of modern digital banking that promotes financial inclusion of MSMEs, where cloud-powered technology with enormous scaling abilities helps in analysing an MSME’s credit risk through non-conservative means (current expenses and growth rather than bank balances) so that MSMEs have pre-approved loan options which they can on omni-channel platforms.
If fintech is an area of worry for MSMEs it should help put one’s mind at ease that recently announcement RBI recommendations to regulate e-loans, the central bank’s panel constituted to investigate fintech lenders clearly stated that licensed fintech and NBFCs, such as those that banks are allowed to collaborate with, will be allowed to operate if the government implements the central bank’s proposal to rein in indiscriminate fintech.