Modernising MSME Lending is the top mission for Bank and FinTech Collaborations

Even as the resilient MSMEs (Micro, Small and Medium Enterprises) across India are widely celebrated as ‘the backbone of Indian Economy’, ~85% of  6.33 crore MSMEs, still are underserved on business financing (source : IFC report). The Financial Express article dated April 3, 2023 on Avendus Capital’s paper on MSME lending highlighted that an astounding credit gap of $530 billion exists in the MSME sector. Out of over 64 million MSMEs in India, the report said only 14% have access to credit. Despite various MSMEs-friendly measures by the Govt of India, the sector’s demand for financing (which is rising) is still not being serviced by the traditional banking system in the country. This is due to some fundamental gaps between what Micro and Small enterprises need and what Banks/Financiers demand…

Underserved MSMEs and Massive Credit gap in MSME sector – a big opportunity for Bank and FinTech Collaborations

A large % of MSMEs who usually borrow loans from personal networks including money lenders, don’t have organized documentation and credit ratings. And banks/financial institutions who need collateral find it difficult to assess risk for such small loan needs. This is a big opportunity for FinTech startups to collaborate with banks and modernize lending for MSMEs.

Modernising MSME lending – Bank and FinTech Collaborations

FinTech startups with their robust product and technological expertise and a stronger focus on customer experience, can build intuitive frameworks with data analytics and advanced technologies like AI, ML and Blockchain etc, to assess the creditworthiness of MSMEs and process loan requests. By leveraging Fintechs’ tech stack and integrating them with banks’ systems, both Banks and FinTechs together can

• remove the complexity of legacy processes
• bring in higher efficiencies and data-backed rigor to the loan evaluation process
• and facilitate faster disbursal of loans to MSMEs

Thats how, young FinTechs like ProFinTech can modernise MSME lending through

1. conceptualizing products, lending processes anchored in advanced data analytics, cutting-edge modelling techniques
2. working with banks/financial institutions closely to modernize legacy lending models/processes, underwriting models and to plug in risk-adjusted pricing & faster lending decisions

(*a quick line on Automated Underwriting here – by analyzing customer data and employing predictive modelling, lenders can assess the creditworthiness of small businesses and offer loan terms customized to their specific needs)

Some of our conversations with the younger generation of entrepreneurs, MSMEs have reinforced the need for the bullet points 1 & 2 mentioned above.  We also noted a strong sentiment – “Banks and Financial institutions should increase their ‘risk appetite’ and take risk with us, professionals who are driven by big ambitions. We are not fly-by-night operators. Sure, there have been bad cases, but we won’t be like them”. While this sentiment from younger gen of entrepreneurs is a rightful demand, we cannot ignore various constraints & commitments under which Banks (big, small, emerging, risk averse, risk hungry etc) need to operate. 

Modernising MSME lending is becoming the priority for Banks/Financial institutions

More and more banks around the world are prioritising  the growing base of MSMEs, Tech entrepreneurs, Gig economy, Startups etc, and are exploring partners who could build distinct SME-lending models for them or who could disrupt their legacy processes. Some already are implementing next-generation credit decisioning models. Striking a cohesive and mutually beneficial partnerships is a critical step for banks – because they always have this stress to reduce the risk associated with lending & the burden of NPLs (non-performing loans), and on top of this now they have to give ‘full access to the accumulated data/data repository’ to the chosen partner. Sounds discomforting, right? 

Modernising MSME lending impacts the operating milestones of Banks, significantly, says McKinsey

As per McKinsey , modernising & reimagining MSME lending can lead to a significant impact on the operating milestones of banks :

1. 10-15% revenue boost through higher conversion rates
2. 20-30% operational efficiency gains because of digitizing the customer journey and touch time reductions
3. 10-25% reduced risk of NPLs by enhancing risk models and making automated decisions using analytics

While discussing a live case study of a large European bank, McKinsey team demonstrated the seamless new customer experience driven by a transparent and fully digital application process that takes only 15 minutes (see the image given below)

Some global & big financial institutions have already started New Generation lending processes and credit decisions 

We are briefly touching upon a few banks who have been quite fast-paced on transitioning to new-generation credit decisions & lending processes

1. JP Morgan Chase, one of the largest financial institutions in the US, has been investing in AI and Machine learning for credit decisioning, fraud detection and sharper risk management. The Jan 2023 Fortune article reports – ‘CEO Jamie Dimon has said hundreds of millions of dollars per year are being spent on AI efforts across the bank, which are in turn part of a broader technology drive on which the bank is spending an astounding $14 billion per year’   

2.Capital One, widely recognized as a leading edge financial institution, leverages data analytics and their machine learning resources to develop ML for credit risk assessment (based on predictive technology),  and to offer personalized financial products to its customers.

3.From China – Ant Group’s digital lending system and its digital bank – MYBank, which employ Big Data have been a game-changer in financial inclusion and in SME financing.  

4.In India, both giants like SBI, HDFC, ICICI, Axis and nimble-footed smaller banks, are doubling down on adopting AI and ML to strengthen their credit assessment processes and offer customized lending options.

With such a conscious pace of transition from Banks/Financial institutions, we all can be confident of reducing the existing credit gap to the tune of billions of dollars in the MSME sector. Let’s remember, the credit gap would not vanish in a few nights and days. But it certainly would push young FinTech like ours to investigate fresher paths to address the problem – at ProFinTech, we are building a live trade based financing ecosystem for MSMEs, which generates multiple financers for every loan need and facilitates timely financing at low cost, quickly. 

Credits : Jyothsna, Google Search Engine, McKinsey, Harvard Knowledge