Fintechs – The engines of Msme credit
CNBC-TV18 aired the second episode of “Building it Up with Bertelsmann”, highlighting India’s dream of achieving a $ 5,000 billion economy and how fintechs play an important role in it . MSMEs are one of the most dynamic sectors of this shared vision, contributing 30% to India’s GDP. The main concern, however, is the disproportionately low credit share of the current financial system. The MSME credit deficit is estimated at Rs. 882 trillion. The esteemed panel highlighted how this credit gap can be bridged. The panelists included:
According to recent figures, over 63.4 million MSMEs in India contribute 6.11% of manufacturing GDP, 24.60% of service sector GDP and 33.4% of Indian manufacturing output. However, the biggest problem they face so far is accessibility to credit. Currently the credit spread is Rs. 30 lakh crores. Speaking about the reasons for such a wide gap, Pankaj recalled that 5-6 years ago, when they were considering writing a thesis on business lending, they realized that this whole segment of small business lending companies had a fairly large gap in the market. due to lack of transaction data. It took a long time for the banks to underwrite small businesses; therefore, the cost is much higher than the yield. So the only way to bridge the gap is digital lending, which is what Lendingkart and Rupeek are doing.
Going deeper into the fact that MSMEs have been denied funding despite their creditworthiness, Harshvardhan highlighted a lack of data and information asymmetry. Therefore, they relied on digital data that they could assess. Second, due diligence operating expenses were a significant concern, necessitating its automation and standardization. Another goal is distribution. You can choose which customers you want to lean on in the digital space. Bringing in and serving the right customers will be essential in the credit business.
Fintechs have caused a major disruption in lending, with online loan applications being the main feature. A relevant question that arises is the potential of online gold loans offered in the market. Sumit pointed out a conventional stigma attached to gold lending that it is a sign of financial distress. We as a country have $ 2.5 trillion in gold and less than $ 70 billion in gold loans have been recorded so far. In addition, innovation is necessary for the distribution part in order to considerably reduce operating expenses. We have gold loans from 6-7%, up to 30-35% interest rate for an asset class with zero credit risk, which ultimately doesn’t make sense.
Speaking about Rupeek, how he is redefining the new category for Indians, their offerings, and how they are spreading the practice of getting credit on gold, Sumit explained that many private sector banks are working. with public sector banks and NBFCs. They facilitate various forms of distribution of gold loans, such as door-to-door distribution or direct walk to bank branches. Apart from that, they are looking to launch ATMs that will facilitate gold transactions i.e. handing over physical gold from clients to the lending partner.
Further, discussing the credit rating criteria and the loan disbursement process, Harshvardhan stressed the importance of stopping relying on conventional parameters such as financial statements and tax returns that most borrowers could not provide. The idea is to find out where we can get the alternative data that is digital, authenticated and sufficient to rely on and assess creditworthiness. So they started with banking data, which has become a great savior. This is authenticated data that could be digitized, and algorithms could read it as well, allowing the use of algorithms and machine learning processes.
In a word
MSMEs employ around 120 million people and account for around 40-45% of India’s overall exports. However, something is preventing MSMEs from thriving, whether it’s the lack of accessibility to credit that keeps them from growing in size and adopting technology or whatever. Pankaj focused on the fundamentals leading to the credit spread. MSMEs and the entrepreneurs who set up these businesses are creditworthy. The problem is the lack of structured data to get credit to grow their business. If gold loans or alternative data that companies like Lendingkart use to disburse loans, they can acquire capital that these entrepreneurs can fuel their businesses. It’s a huge opportunity to become a $ 5,000 billion economy.
This is a partnership post.