Small businesses in India have a crucial role to play because of their potential contributions towards the improvement of income circulation, employment creation, poverty reduction and the export growth and development of entrepreneurship, industry and rural economy. This sector is a key driver of our country's industrial growth as it comprises about 36 million enterprises that generate over 6,000 products and employ more than 106 million workers. Yet according to government estimates, only 4 percent of 57.7 million small business units in India have access to institutional finance, leaving many to rely on informal lenders.
Access to finance is perhaps one of the biggest pain points for small businesses in India. Without funds, they can neither secure new technologies nor can they explore new geographies to compete in global markets or even strike business linkages with larger organizations. Banks usually make an exception when it comes to lending to small firms because of the lack of comprehensive monetary information and a standardized financial statement by these small firms. Banks feel that SMEs are vulnerable to market risks and do not have collaterals that can be used as a guarantee. Further, banks are unable to figure out whether SMEs have the technical, professional and marketing expertise to generate adequate revenue to service loans. Despite several policy initiatives, schemes of the Government and allocation of funds by financial institutions and banks, this continues to be an issue. Even amidst the flagship programmes and Schemes announced by the government, most small businesses feel left out and are yet to see an improvement in the ease of doing business.
Today small businesses have begun showing their inclination towards Digital finance for loans. These online platforms provide accessible loans in smaller amounts to the SMEs and aspiring entrepreneurs. The Digital Lending companies operate in areas where there are no bank branches and where people traditionally have relied on loan sharks who charge exorbitant rates. The lending platforms use analytics and other propriety software to analyze the credit worthiness of the small business owners wherein most of the credit risk analysis is done digitally so that loans can be disbursed in hours even in tier-2 cities. No wonder, the small business owners are able to get funds in an efficient manner. While banks look at the balance sheets and accounts to make a credit decision, the Digital Lending companies tend to also factor in the potential of the small businesses besides other assets.
Meanwhile, the usage of technology has disrupted the Indian financial space by making it faster and more resourceful and reducing the multiple rounds of documentation that take place while interacting with a traditional player in the space. With innovations in the business model, technology, credit screening, credit scoring and better pricing, small enterprises will have access to more capital in the near future. Although the financial service market in India is growing at a fast pace, it still needs to emphasize a lot on elevating the marginalized sections of society to the middle class, opening up the market for funding to the MSME sector.
Authored by Mr.HarshVardhan Lunia, CO-Founder & CEO, Lendingkart