India is home to over 2.5 million small businesses, contributing around 30% of the country’s GDP. MSME enterprises employ a large section of India’s population. It is, therefore, unfortunate that nearly 87% of these units don’t have access to adequate credit sources. A business loan nourishes businesses to expand in good times and sustain in difficult times. However, many SMEs operate from non-metro locations. With a limited formalized banking presence, non-formal sources dominate the credit landscape in these locations.
Modern lenders offer loans through offline as well as online platforms. While SMEs can opt for either channel for availing an SME loan, having a digital footprint can be immensely beneficial for them.
Why is digital footprint recommended?
Having a digital footprint opens avenues for better credit access. The presence of a bank or NBFC branch nearby doesn’t in itself mean access to credit. Unless you have the necessary documentation and credit history, business loan offers can be hard to come by. However, if the SME has a strong digital presence, some of this can get compensated. Information on the SME unit can be available digitally in the form of social media data, merchant rating in e-commerce platforms, bill payment history, and Income Tax and GST records, and so on. The lender can assess the repayment capacity of the SME based on its digital profile.
How digitization helps the SMEs
An SME located in a small town may have physical access to a bank branch or two. However, it can apply to any public or private bank, NBFC, lending apps, or fintech company on the internet. Business loan eligibility can be checked online, and the loan application form too can be filled online. By uploading the supporting documents, the e-KYC formalities can be concluded. These loans are often processed speedily and disbursed immediately on approval.
As more and more lenders are opening to digital data sources, the business loan process is becoming faster and transparent.
Growth in digital credit – clear indicator
Digital lending has expanded over 12 times in seven years to reach $110 billion in 2019. A significant contribution to this has come from MSME units. For these units, digital lending has emerged as a replacement for non-formal credit options. These lenders are using multiple data sources to assess the creditworthiness of business loan applicants. Advanced technologies like big data analytics and machine learning algorithms are being used for this purpose.
It is important to note that the government is also encouraging SMEs to push towards digitization. Initiatives like MSME DataBank and MSME Sampark are building a digital repository of India’s MSME units. MSME ministry is raising awareness about the benefits of digital payment, which can add to the digital footprint of these units. With more footprint, it is expected that more SMEs will be able to borrow when they need and flourish from it.