“Improving borrower identification, creating essential credit scoring products to boost SME financing”

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By Vikas Kumar

Credit and financing for MSMEs: The past two years have changed the face of the finance and fintech industry globally. The pandemic has accelerated the growth and adoption of digitalization all over the world and this, in a way, has had an impact on the business world. Around the world, SMEs are now a force to be reckoned with. They are the big wheels that keep the strings of the economy turning and create job opportunities along the way. The sector is always hungry for a uniform funding system, which can help it thrive to its full potential. The struggle for consistent funding is real.

The reason for this funding gap is that SME finances are complex, but small-scale processes. Size of operation, industry, customer segment and development all contribute to how this industry performs against other verticals. The main drivers of difficulty in the sector are the small size of loans, the higher cost of managing the segment and the limited accessibility to provide real estate guarantees. These factors further limit support from financial institutions.

The changing face of SMEs

Going digital has enabled the SME sector to automate, accelerate or reduce payment risk, improving the overall experience. Although digital transformation has been the biggest revolution of this era and era, it has yet to become a ubiquitous system to work with. There are many entities and players in the market that have yet to adopt or transition to the digital side of things. Geographies also determine the complexities of SMEs unable to obtain the desired financing. Less developed regions like sub-Saharan Africa, South Asia and East Asia are more likely to suffer from financing and support which are the most crucial variants of growth.

The volume of credit for SMEs generally comes from commercial banks, credit unions and cooperatives. While banks have always been reluctant to work alongside SMEs, over the past two years, with the right government support, banks have been able to position themselves as lenders or strategic partners in the process.

How to improve SME financing

It has been difficult for the SME sector to prove their creditworthiness due to the lack of credit information, which is a key factor. So far, traditional institutions like banks have not been very willing to support or partner with this sector, mainly because they do not have fixed assets as collateral. Given that SMEs rely heavily on movable assets to access finance, this becomes extremely uncomfortable due to the insolvency frameworks that exist and are insufficient to improve the overall health of the sector.

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The only crucial way to improve the overall perception of the sector and give it the much-needed boost is to improve borrower identification, seek out more sources of information on borrowing, and create research products. credit assessment adapted to SMEs.

The digital switch and its adoption

The pandemic has changed the way we transact. The digital shift and lockdowns due to the pandemic have reduced the major use of cash and cards, and the shift from physical stores to e-commerce. With the increasing use of personalized solutions such as QR codes, “touch to pay” and link-based payments, transactions and commerce have become simpler and improved the overall customer-merchant experience.

With global coverage of basic Internet facilities, even if not optimal, it has still allowed companies to gradually improve their transactions and interactions with their customers. The current array of government incentives such as Start-Up India, Make in India, Vocal for Local, etc. contributes significantly to improving the overall health of the sector. According to a report by Forbes, there has been a 50-70% increase in internet usage, which has led to an increase in online activities.

Rationalization process

A key factor that can really provide the required boost and will soon become the norm is automation and cloud technology, becoming more agile and organizing credit risk models without human intervention. Digital lending providers can also help accentuate transactions related to the sector. This can enable sound recording of customers and their data is protected, simple and transparent digital payments, keeping track of all malicious activity, easy customer identification among other benefits of making this change. Expanding financial inclusion, reducing processing costs, long-term fintech and banking partnerships, and creating bespoke services in lending are all necessary steps to take in the future or adopt a healthy economic climate.

Vikas Kumar is the CTO and co-founder of LoanTap. The opinions expressed are those of the author.


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