Bridge the gap and conquer the market

Fin-tech firms can collaborate with banks to strengthen their resolve to deliver services to MSMEs based on areas of expertise

Micro, small and medium scale enterprises (MSMEs) form the backbone of all emerging economies. In India, the estimated number of MSMEs, as per the 73rd round of National Sample Survey Office (NSSO) was 633.88 lakh, out of which 309 lakh are rural and rest 324.88 lakh are urban. This sector contributes around 30 per cent to both Gross Domestic Product (GDP) and Gross Value Added (GVA). Interestingly, out of 633.88 lakh  MSME enterprises, more than 99 per cent (630.52 lakh) are micro enterprises. Ironically, 90 per cent of these micro enterprises have no means of access to formal finance. Large banks are a means of finance for formal as well as informal MSMEs in all economies. However, these are stifled by restricted access to financial services and non-financial services like credit, risk assessment, insurance, equity et al. While on the one hand, a slew of opportunities to these enterprises for timely access to credit at affordable interst rates can be an important factor in spurring growth of the economy; on the other, this sector can provide a profitable business opportunity for local/regional banks. If catered to profitably, the sector can become a portfolio rendering consistent income for the banks. Realising the challenge, banking authorities have been making attempts to reach out to this sector but with limited success.

A ray of hope are latest innovations in bank lending models, which fuelled with the advent of new technologies, offer a potential to tackle the challenges faced by MSMEs. Leveraging technology, the lending models created would make it easier for the borrower to get finance on time and for the lender to obtain complete information on the borrower’s credit history (about the entrepreneur’s idea/product), thus building trust between the two parties and, thereby, reducing time for credit disbursal and transaction costs. Such innovative approaches to financing has been possible due to technological advances like big data — the stock of which, according to estimates by the International Data Corporation, is slated to more than double every two years between 2013 to 2020 and the total data market is expected to nearly double in size, growing from $69.6 billion in revenue in 2015 to $132.3 billion in 2020. Analytical and processing capabilities have grown enabling algorithm driven predictive analytics to deliver insights on credit data. Also, smart mobile devices have enabled wider access to data and technology. These disruptions have provided an opportunity to a new segment of financiers to place themselves between the MSMEs and banks, and take advantage of MSME lending and payment value chains. Disruptive companies are adopting innovative approaches to render the required services to the firms in MSME sector. For example, Lenddo, a technology company founded in 2011, uses non-traditional data (Facebook, Linkedln, Twitter) to compute peoples’ credit scores, thus, providing micro loans to emerging middle class in developing countries.

Similarly, Kickstarter is a crowdsourcing platform, where entrepreneurs can pitch their idea for a product and get financing from interested people on the internet. The alternative lending platforms and aggregators (the so-called fin-tech companies) are offering services to MSMEs that are convenient, efficient, flexible and tech-enabled. For example, in India, it includes companies like Happy Loans, Ziploan, Biz2credit, Faircent, KredX, among others. These companies use latest technology and ride on the wave of big-data, analytics and automation. The companies are using aggregator data from platforms like e-wallets and e-commerce to compile information on the repayment abilities of the MSME clients while also offering services like “a weekend loan product” to offer what traditional banks are unable to offer. However, the models adopted by these new-age companies have not yet been tested as most of the companies are young and yet to figure out about the return on investment of their companies. These models will have to prove right by giving returns to their investors (private equity firms/ angel investors/ venture capitalists).

These companies lack experience, sufficient funds, existing customer database. This is where banks score over the companies and this also provides an opportunity for banks and non-banking finance companies (NBFC) to partner with them thereby helping them to scale-up and shift some of their risk to NBFCs/banks while enabling banks not to relinquish the MSME opportunity to competition; thus, creating a win-win situation for all stakeholders. When we talk of collaboration of banks with Fin-tech firms, there can be several ways of doing that. One model that the Reserve Bank of India has been working on is a formal ‘co-origination’ model. Under this model, the bank financing a Microfinance institution (MFI) or NBFC and the concerned MFI or NBFC join at an underwriting and share the loan amount at an agreed percentage with all other structures put in place. This model aims to bring together strengths of both NBFCs (which have a better understanding of ground realities of MSMEs) and the banks (that have resources). A model with similar features can work for collaboration of banks and fin-tech as well, wherein both deliver services to MSME based on their area of expertise.

(The writer is Associate Professor and programme co-ordinator,Amity School of Economics)