FinTechs were called upon to develop credit assessment models for MSMEs.

Nero Vigilance by Mr

India is climbing the ranks to become the third largest economy in the world very soon.

As the nation looks to improve its standing over the next 25 years – the unabated growth of the Micro, Small, and Medium Enterprises (MSMEs) sector will be critical for India to continue its growth as an economic superpower. Maintain position.

While MSMEs have been treated with priority sector credit obligations in recent times—the sector remains a difficult segment to serve in the financial ecosystem.

With digital SMEs doubling over the next five years, the projected demand for working capital is expected to reach USD 570 billion.

About 95 percent of credit demand is generated by micro and small enterprises.

Many of these small businesses face difficulties in raising capital due to inadequate business metrics and limited assets. There is a lack of reliable data on the financial health of MSMEs. Because of this, there is a high level of asymmetry of information—making it a difficult task for traditional lenders to assess the creditworthiness of an MSME.

Plight of thin-file MSMEs

Thin-file MSMEs often face limitations with traditional credit scoring data, which inhibit their ability to secure funding in a timely manner.

On the other hand, many traditional financial institutions focus primarily on serving superprime and prime customers—in turn, neglecting the MSME segment.

From a broader perspective, factors such as a failure to understand the diverse needs of the MSME sector as well as stringent lending and repayment norms have slowed capital inflows to these businesses.

This scenario presents an opportunity for FinTech companies to tap into low-income groups by leveraging digital solutions.

Demand for FinTechs to revolutionize credit assessment with innovative models

Demand for unsecured loans from these thin-file businesses has seen a substantial 73% year-on-year growth.

The increasing dependence of MSMEs on digital platforms results in a digital trail of financial transactions. New generation FinTech firms use this wealth of data to efficiently assess creditworthiness and offer quick working capital financing solutions.

FinTechs are using alternative credit scoring data derived from diverse sources, including digital footprints and comprehensive public records.

By leveraging advanced algorithms and alternative data sources, FinTechs can:

Automate tasks that were previously manual.
Speed up and improve credit underwriting workflows
More importantly, offer alternative financial products and services that are more economical, faster and scalable.

Alternative sources of data allow deeper insights into customer finances and significantly improve credit underwriting. Analyzing a wider spectrum of customer data across different channels — FinTechs are uniquely positioned to gain more accurate insights into borrowers’ financial stability and ability to repay loans.

Leveraging data-driven underwriting tools and cash flow-centric evaluations, we are looking at how FinTech lenders can leverage reloadable and pay-as-you-go financing and envelopes to meet the urgent capital needs of MSMEs. are providing flexible loans of size

Additionally, innovative digital solutions such as cluster-focused funding, point-of-sale lending, peer-to-peer, invoice-centric, and cash-flow-based lending offer greater flexibility to new credit and thin-file customers. , enabling them to access credit and build a credit history.

Digital lending in India has taken off faster than we predicted.

FinTechs are looking to leverage new data sources to assess the creditworthiness of MSMEs in the country. As a result, they have initiated a systemic change, making the entire lending process paperless and, in many ways, less present.

As a result, digital lending has grown significantly over the past decade, driven by embedded lending, data-driven loan targeting, and innovative FinTech models.

Digital payments have grown 12-fold in India, and this trend is only set to increase in the coming months.

In 2024 and beyond, AI-powered underwriting and improved automation will accelerate the digital lending process, resulting in higher rates of faster, error-free approvals.

With the help of smart integration with data providers — FinTechs are enabling intuitive digital journeys and contextual product placements at points of need to provide timely credit to MSMEs.

The need for an ecosystem-based approach

Bridging the substantial $530 billion gap for MSMEs requires a strategic combination of traditional bank and NBFC credit facilities along with innovative financing solutions from emerging FinTech lenders.

Adopting an ecosystem-based approach and aligning with digital public infrastructure will be critical in further expanding MSME lending.

Through coordinated efforts – Banks, NBFCS, and FinTechs can create efficient and tailored approaches to meet the unique needs of MSMEs, resulting in mutually beneficial outcomes for all parties involved. .

This dynamic collaboration can play an important role in promoting the growth of the MSME sector.

The bottom line

Combined efforts by the government and regulators are pushing financial institutions to promote sustainable digital lending practices and financial inclusion initiatives. These initiatives focus on security, digital client onboarding, customer convenience, and dispute management.

This transformation also includes deploying personalized underwriting strategies tailored to specific market segments, using alternative data sources, and implementing credit decisions based on scorecard analysis.

The capabilities and technology to engage MSMEs and serve their specific needs profitably are widely available to financial institutions today. Now is the opportunity to adopt these technologies and new ways of working to successfully serve this segment.

This will require banks to make the MSME segment a real priority. Armed with AI capabilities, data-driven approaches, and mutually beneficial collaborations with FinTechs, banks can create a suitable credit-worthy pool of potential borrowers.