Financing options for micro-small-medium-enterprises (MSMEs) is set to undergo a digital transformation over the coming months. Lenders believe financing options will become cheaper for MSMEs, particularly in supply-chain finance and trade finance, as a result of better access to data and bank-fintech partnerships.
In the wake of the pandemic, MSMEs have been adopting various digital platforms and tools to conduct their business, be it for payments, marketing, or banking services. According to a December 2020 survey by CRISIL Ratings of 566 SMEs, 53% of them had adopted digital tools like online aggregators, marketplaces, social media, and mobile marketing as of November compared to 29% prior to the pandemic.
For lenders, this has also translated into a sharp rise of new business flowing through the digital channels of banks. “Despite their limitations, micro-enterprises are not very far from small enterprises in digital adoption. Also, many more are now saying they will take the digital route soon. This underscores the fact that increasing digitalization enlarges the footprint of MSEs, helping them tap newer markets and improving their access to credit,” says Bhushan Parekh, senior director, CRISIL Ratings.
Digitisation of MSME lending
What is supply-chain, trade finance: In supply-chain finance, a bank or other lenders provide liquidity to a large manufacturing corporate, for example, when they place an order with vendors. Similarly, in trade finance, a bank or lender provides the financing to international trade, whether for export or import finance. Both products aim to meet the financing gap between buyers and sellers. In the case of the Trade Receivables Discounting System (TReDs) and most supply-chain/trade finance models followed by lenders, the decision to lend is dependent heavily on the corporates’ credit quality and reputation. Introduced in 2017, TReDS is an integrated system for invoice-discounting between corporates, MSMEs and financiers.
Supply-chain and trade finance has suffered infamously from an information asymmetry problem. Most MSMEs in the country either do not have formal financial records or access to formal credit channels. This increases the credit cost and risk for bankers to lend.
However, in the last few years fintechs, data companies and Software as a Service (SaaS) companies are addressing this information asymmetry with the use of artificial intelligence (AI) and alternative data sources. They are able to compile unstructured or informal data to understand a businesses cash-flows based on which a lender can underwrite short-term loans, for 30, 60 or 90-days.
“Today, our system can check the borrowers’ information quickly to assess the credit quality. We have Goods and Services Tax (GST) data, the e-challan platform, Income Tax filings and we also partner with technology companies that create tools to validate customer information, all of which allows us to make better decisions about lending,” says Litesh Majethia, Head of Supply Chain Finance, Bank of Baroda. He added that post the pandemic, SMEs have been adopting digital tools and that they are engaging with the banks’ digital channels to a greater extent.
“Post the COVID-19 pandemic, we have seen more MSMEs reaching out to us to understand about TReDS. We have also witnessed a growth in digital awareness and literacy among MSME vendors,” said Prakash Sankaran, managing director, and chief executive officer, Invoicemart.
New systems for MSME lending
While banks and non-bank lenders have partnered with fintechs, Software as a Service (SaaS) firms and other startups, either as data providers or third-party lenders, new systems as part of the India Stack are expected to have a big impact on the industry. For instance, with the Account Aggregator (AA) system, banks and non-bank lenders will be able to access bank account statements and other financial data of potential borrowers, digitally within minutes. Further, the Open Credit Enablement Network (OCEN), aims to bring MSME borrowers and lenders together through a uniform credit rail. It is developed by the Bengaluru-based think-tank iSpirt (Indian Software Products Industry Round Table).
The first iteration of the OCEN rail will be called Sahay GeM, which will be integrated with the governments’ e-procurement portal, Government e-Marketplace (GeM) which has over 3 lakh MSMEs, most of whom do not have access to formal credit. At present, leading banks like State Bank of India, ICICI Bank, HDFC Bank, Axis Bank, IDFC First Bank, and non-banks like Bajaj Finserv have been enrolled onto the Sahay GeM platform. Through the GeM platform, when an MSME receives an order it can use the invoice it sends to the government to apply for a loan, either on the Sahay portal, bank, or on a third-party app that will sit on top of the OCEN rail.
Ramaswamy Iyer, founder and chief executive officer, Vayana Network, says that traditionally the supply chain market has been anchor-led and banks had very little interaction with SMEs. “Technology is certainly reducing the cost of acquisition and cost of servicing costs. I believe with e-invoicing standardising invoices, the AA system and the Public Credit Registry will make the on-boarding and engagement much easier for SMEs over the coming months. Further, with OCEN, I believe many small businesses will benefit from competitive lending rates in that market,” he said.
According to Sankaran of Invoicemart, TReDS platforms are going scale-up in the coming months as they get access to new data sources and systems through which supply-chain financing for MSMEs can be improved. “The integration of TReDS platforms with GeM will lead to a pick up in the number of MSMEs on the platform and the announcement of the Central Know-Your-Customer Register for Legal Entities will enable us to move the onboarding journey to a 100% digital journey. The GST e-invoicing system will also help move the entire transaction flow to a 100% digital process,” he said.
Emerging bank and fintech partnerships
In the last few months, banks have opened new partners with fintechs and other lenders to upgrade their supply-chain and trade finance products. Banks would rather focus on the lending decisions and therefore they are working with companies like us and other fintechs who can provide data analytics and artificial intelligence, among other tools, says Nirav Choksi, chief executive officer, Credable, a supply-chain fintech lender.
“In case a corporate has 5,000 vendors, it would be very costly for bank to digitise their documents and then on-board them as borrowers. Our platform can help reduce the on-boarding costs for lenders and the borrowing costs for vendors. We have seen a significant addition of new customers on to the platform, while corporates are increasing the number of vendors who come into the fold of their supply chain programs,” Choksi said. He added that they were disbursing ₹100 crore worth of loans a month prior to the lockdown which has grown to ₹1,000 crore at present.
Similarly, domestic banks are working with Prima Dollar, a London-based trade finance fintech that recently launched in India, to provide trade finance options through an entirely digital process. “Trade finance had a legacy rectangular system between 2 financiers and an importer and exporter, which meant that it took 30 steps and 10 days for the exporter to get finance. The products offered by banks for trade finance works, but in a bad customer journey. Through technology we can improve the customer journey. It is not a unit-cost economy problem but a customer journey problem,” says Tim Nicolle, CEO, Prima Dollar.
Since trade finance requires lenders to provide credit to a buyer against a bill of goods, lenders need to conduct due diligence on both ends of the transaction. Due to an information problem, over time the share of bank financing in trade finance has fallen globally in the last few years, says Nicolle. “We have a global underwriting and credit management practice and access to financing at low-cost. We underwrite to 40 countries so Indian firms can be confident about the buyer and through our platform, a factory in India can get paid at shipment, while the buyer pays later. With our system we can complete a transaction in 6 days,” he said.
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