How Covid-19 is reshaping lending for SMEs
Opinions expressed by Contractor the contributors are theirs.
You are reading Entrepreneur India, an international Entrepreneur Media franchise.
The fortunes of small businesses across the country have been severely affected by the pandemic, causing them to reel under the pressure of dramatically reduced cash flow and therefore desperate for a lifeline. Recognizing their vulnerability, the Indian government announced unsecured loans of 3 lakh crore INR to increase liquidity and give them a fair chance of survival. However, to ensure that government relief measures are effective, it is imperative to ensure that capital flows to the right companies that can survive and thrive. This means that the eligibility filter must overcome the barriers of traditional lending decision-making which has already created a credit deficit of over $ 400 billion in the SME category.
However, we can see a shift taking place in lending which will hopefully help close this gap. Here are some of the ways the pandemic has forever reshaped SME lending.
The emergence of cash flow-based loans
Due to the advent of technology resulting from, among other things, data analysis and artificial intelligence (AI), various lending practices are evolving. One such example is the cash flow based loan, which is the need of the hour to increase the flow of credit to the SME sector. However, to benefit from it, SMEs must demonstrate exceptional accounting practice, such as filing returns, a higher credit rating, and better banking habits.
The digital boom
After COVID-19, a big trend that will continue to be on the rise is the rise of digitalization. We are already seeing the rise of digital payments and online sales, even at the level of micro-SMEs. This cuts down on cash transactions and sheds light on the real-time cash flow of these small businesses. This data can enable them to obtain loans from more formal channels rather than local lenders. Second, through digitization, models can be drawn on working capital cycles and platforms that can predict when the shortfall is likely to occur. This will help SMEs to prepare in advance to expand their business track. We will also begin to see the rise of contactless verification processes, where the SME can obtain a loan without having to go to a physical branch of a bank. Customer service and advice through chatbots and a more fun (interactive) loan application process is also a new trend that is reducing the cognitive load on SMEs when applying for a loan.
360-degree data aggregation and evaluation
The SME segment is largely fueled by liquidity and the UPI economy, making it extremely difficult to provide evidence such as bank statements and other mainstream reports for credit decisions. As a result, small businesses that are healthy and eligible are completely excluded from the lending landscape. 360 degree data aggregation and consolidation to make a decision is the need of the hour. The conditions, the rate and the right amount of capital are essential and it can only come from the possession of data. A credit decision mechanism that evolves from traditional bank statement data is essential. This process is already in place and an example that demonstrates this change is the Open Credit Enablement Network (OCEN). As part of this new ecosystem, OCEN will connect lenders and markets to use and create a diverse range of large-scale financial credit products.
The rise of specialized lenders
Specialty lenders who can create scoring models based on cash flow, with flexible systems to accommodate different repayment frequencies, and who can add more value to help the business grow (such as analytics). predictive, accounting tools, etc.) will have an advantage. Online products will also be favored, as interest outflows would be limited to only the portion withdrawn and there is repayment flexibility at any time. Specialty models such as point-of-sale loans and peer-to-peer loans are also gaining popularity. Fintechs and neobanks are partnering with banks to bring their expertise in data aggregation, digitization and analysis to bring about a change in the way customers are evaluated. This will go a long way in bridging the credit gap that exists in the SME segment, mainly due to the lack of data to make decisions in the traditional approach.
Fintechs and neobanks offer global solutions to SMEs. They not only provide bank accounts and loans but also many related services like helping new businesses set up billing and accounting, manage payroll, automate employee expense management, virtual cards, creation of online sites, configuration of payment gateways, etc. roof. Fintechs and neobanks have technology-driven systems that are able to adapt to changes (like the moratorium) much faster. They are also more agile in adapting to new scoring models and using alternative data to make a loan decision. There is therefore a certain feeling that neo-banking platforms and fintechs will gain momentum and offer a better and more personalized experience, for the customer who is the need of the moment.
The tide is already turning and change is taking place. Hopefully after the pandemic, most of the lending challenges SMEs have faced will be alleviated, allowing small businesses to have access to the best resources that will see them thrive and prosper.