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 unfortunate that nearly 87% of these units don’t have access to adequate credit sources. A 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 an SME loan, having a digital footprint can immensely benefit 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 documentation and credit history, business loan offers can be hard to come by. However, some of this can be compensated if the SME has a strong digital presence. Information on the SME unit can be available digitally through social media data, merchant rating in e-commerce platforms, bill payment history, Income Tax, GST records, etc. The lender can assess the repayment capacity of the SME based on its digital profile.
How digitization helps the SMEs
An SME 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 app, or fintech company on the internet. Business loan eligibility can be checked online, and the loan application form can be filled out online. By uploading the supporting documents, the e-KYC formalities can be concluded. These loans are often processed speedily and disbursed immediately upon approval.
As more lenders open to digital data sources, the business loan process becomes faster and more transparent.
Growth in digital credit – a 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 print, it is expected that more SMEs can borrow when needed and flourish from it.