Digital lending – The game changer in SME financing

Updated On : April 2019

SMEs are the pillars of the Indian economy and play a crucial role in the economy by contributing to the growth of the GDP, exports and employment. So it is extremely important for banks to address their financial needs as small businesses also constitute a significant customer base.

In the past, financial institutions have not been able to serve this huge customer base of SMEs which stunted their growth. One of the main hurdles was the lack of ease in transactions faced by SMEs.

The advent of technology has brought in great scope for optimizing payments, increasing revenue and cross selling. It also reduces the need for human resources and strength in the documentation and follow-up processes. Moreover, SME users being equipped with mobility are able to connect from anywhere, anytime. In the wake of the demonetization process in the country, cashless transactions have found their place and thus loans are disbursed in an easy and convenient way. This is also resulting in SMEs looking at digital players who are catering to the earlier underserved part of the market.

Digital lending, which does not require paperwork and is done through electronic means, is changing the industry with SMEs focusing on its benefits and power to build their businesses and take it to the next level. With the government joining the movement and encouraging digital payments for SMEs, banks are expanding their portfolio with a number of commercial banks today offering business loan to GST compliant SMEs in 24 hours. Besides digital ecosystems, blockchains and robotics, lending institutions are adopting automated processes whereby lending decisions are taken over by algorithms.

Some ways digital lending is boosting SMEs and can change the landscape

• Digital Lending offers SMEs the 'line of credit' which allows them to avail easy access to funding.

• Customer experience can be made smoother and more pleasant by using smart tools and algorithms to consume less time when availing a quick and small loan.

• Digital lending has adopted unconventional approaches to assess SMEs by using credit scorecards along with numerous raw data points. Some lenders conduct tests to analyse candidates financial information or use social media metrics to access credit scores. This allows lenders to offer unsecured loans to SMEs with basic documentation, without any guarantor or collateral.

• With digitalisation come online loan applications, automated loan approval processes, and creation of an online platform which help banks to process the SME lending faster. Integrating these automated platforms will help banks gain a competitive edge.

• Digital lending is allowing lenders to offer loans at lower interest rates as they are cutting down on costs from underwriting to operational.

• With digital processing and minimal human intervention in digital lending, there is no room for errors or discrepancies. Hence, assessment is quick, accurate and unbiased which leads to credit under-writing being more scalable.

• With digital lending, SMEs can take time to research different lenders online and make an informed decision to choose the best option. After applying, they can track the whole process online.

• The strong use of technology helps lenders make sure that their client's security is uncompromised with all information and sensitive details of the SME encrypted and secure.

• Other than funding, small businesses need business management tools and guidance on diligently spending working capital. Banks offering personalized advice on banking products and services to SMEs and assisting them on solving various business issues will take them ahead in the game. Early stage SMEs need value-added services, mentorship, guidance, and a solid support system.

• Small businesses need customised solutions as they often face various kinds of challenges at each stage of their financial growth. Banks could offer remote virtual interaction for SMEs with the relationship managers of banks through online tools to book appointments online, irrespective of the geographical location.

Digital Lending is bridging the gap between lenders and borrowers in an effective and efficient way. It giving a new shape to SMEs as it is gaining popularity and proving to be a real game changer and the key to digitizing the economy. It has provided entrepreneurs access to organized funding.