For the past 50 years, small and medium-sized enterprises (SMEs) and micro, small and medium enterprises (MSMEs) have powered India’s economy, especially in rural and semi-urban areas. But they often fail to get adequate financial support from government agencies, banks and financial institutions, according to the SME Chamber of India.
India’s booming fintech market could be their savior.
A faster way
Manjunatha BN runs a music store called Sri Sai Musicals in Bangalore. He needed a loan of $7,800 (5 lakh rupees). Unsure of getting one from a bank, he decided to approach Bangalore-based digital lender Capital Float. To his surprise, he received his loan in no time.
Based on financial statements, bank transaction history and e-commerce transaction behavior among other data sources, his loan was processed. “The entire experience was surprisingly fast and pleasant. Officials from the company are ready to help anytime. I’ll definitely approach them if I need another loan,” he says.
Fintechs specializing in micro-financing are gaining the trust of Indian SMEs and MSMEs.
Stanford University graduate Sashank Rishyasringa cofounded Capital Float in 2013 with classmate Gaurav Hinduja. The company develops tailored credit products for SMEs such as a mobile app for India’s kirana (small neighborhood retail) stores.
By using a customer’s Aadhaar number and electronic KYC, Capital Float offers loans to kirana stores in less than three minutes. Other products include finance for online sellers and taxi drivers, Merchant Cash Advance (loans against card swipes) and Invoice Finance term loans. Rishyasringa says, “The biggest issue is raising working capital. We wanted to build a lending platform for small businesses using multiple data sources.”
Credit underwriting remains a major challenge in the SME sector. Loan officers in India use outdated methods to assess an SME owner’s credit-worthiness. Through proprietary technology using big data, transaction history on e-commerce websites, psychometric questionnaires, and social media behavior, Capital Float disburses loans in an accurate and fair manner. “Many Indian SMEs don’t maintain balance sheets, so we survey alternate data sources to assess credit-worthiness,” says Rishyasringa.
The AI element
Gurgaon-based Loan Frame is one of the few Indian fintechs using AI to offer micro-lending options. An ecosystem of web and mobile applications interact with each other, managing workflow between borrowers, introducers, partners, operations and lenders. AI and machine learning algorithms examine a borrower’s profile to evaluate credit worthiness in minutes.
Following a 60-second eligibility check, borrowers can apply for a loan. "Currently, for unsecured business loans, we take one or two working days from the time of application completion to loan sanction. We want to move towards a turnaround time of a few hours, using advanced algorithms for borrower assessment,” explains Shailesh Jacob, founder and CEO of Loan Frame. Applicants can upload the necessary documents for their loan application on Loan Frame's website or Android/iOS apps. “Unsecured loans are least paper-intensive,” says Jacob.
Compared to SMEs, MSMEs are further under-represented in India and face a bevy of issues with financial institutions.
Aye Finance, founded by bankers Sanjay Sharma and Vikram Jetley, provides financial support to Indian MSMEs. Sharma says, “By deploying a differentiated industry cluster approach, our underwriting algorithms and psychometric scoring tools can highlight patterns that enable quality lending. Our cloud-based automation further optimizes origination and servicing processes, making it economical to offer small-size loans appropriate to the segment.” To address accessibility and last-mile connectivity hurdles, Aye Finance works out of 72 branches across India, mostly in Tier 2 and 3 cities.
India has more than 600 fintechs in lending, payments, insurtech, blockchain and regtech, with investments growing from $25 million USD in 2013 to $364 million USD in 2015, says Swissnex India. Fintechs are finding more takers across all age groups and demographies.
"Banks and fintechs are natural partners"
So, will banks play a diminished role in the future? The founders of all three startups disagree.
Jacob says, “We have a highly collaborative approach with banks. We work with banks looking to diversify their product or geographical footprint in unsecured and secured SME credit. Using technology to lower operational costs, we’re helping them grow their loan books too. Lenders including state-owned banks are approaching us for SME portfolio partnerships.”
Rishyasringa says that banks and fintechs are natural partners in lending: “SMEs are becoming data-rich but remain credit-poor, giving us a chance to leverage data to reach the last mile, which is usually ignored by banks.”
Capital Float has a new plug-and-play platform that allows banks to co-lend with them at no extra operating cost. Through this arrangement, banks provide 80% of the loan to a customer, while the remainder is financed by Capital Float. They have collaborated with five financial institutions for co-lending including IDFC and IFMR, and are expecting two more Indian banks to join their platform next month.
Winning customer confidence
This is first time that small businesses are being wooed by advanced technology offerings to scale their businesses, and the founders say customer reactions range from disbelief to shock. Sharma says, “When they make their calculations and find that our interest rate works to flat 1.3% monthly, versus their existing borrowings at around 3-4% interest, customers are pleasantly surprised. This gets our relationship with them started on a solid foundation.”
Many SMEs are relieved that they needn’t deal with reams of paperwork to procure a loan. In addition, the flexibility of being able to apply for a loan from anywhere is a big incentive, adds Jacob.
Rishyasringa says, “we thought SMEs would take time to warm up, but their response has been quick and positive.” He wants to make loan procurement stress-free and easy in India by actively addressing connectivity hurdles and enabling customer literacy.
