How Alternative Lending Platforms Are Fixing India’s Financial Inclusion Problem

Filling the vast credit gap in India’s SME sector has been a long-running challenge for the government as well as the industry. The sector is widespread and provides a livelihood to millions of people, contributing significantly to the nation’s economic output and exports. But when it comes to securing quick and easy finance, the sector is curbed by legacy problems. Modern technology has the capacity to fix these problems, and alternative lenders are resolving them in innovative ways.

The most common causes of the financial gap in the sector are complex loan approval processes, poor credit scores or supporting documents, and low financial literacy. SME business owners commonly hail from underdeveloped regions. They hesitate to approach formal banks for financing and face unwarranted delays in loan disbursals. The result is an inability to make the most of market opportunities. SMEs, thus, resort to informal lenders who provide quick capital, but with exorbitant interest rates.

The government and industry regulators are now taking note of this market opportunity for SME financing. They are encouraging formal banking institutions to fill the financial gap with uplifting policies and education. However, they may be late entrants to the game as digitally-based lenders have also observed this gap and begun to offer innovative lending products to SMEs.

Alternative Lending Platforms are Revolutionising SME Financing

Powered by modern tools such as cloud computing, AI, machine learning and data analytics, startups are leveraging technology to offer SMEs quick access to finance. Coming under the gamut of non-banking financial institutions (NBFCs), such startups are replacing public sector banks as reliable providers of credit. They don’t depend on historical documents and records to derive the credit history and repayment capacity of SME borrowers. Instead, they turn to AI-based algorithms that serve up personalised profiles of SME borrowers and calculate the best possible loan amounts and interest rates.

Moreover, they eradicate the need for physical transactions with SME borrowers. The removal of geographical boundaries means that borrowers can access financing from any lender across the country in real-time, and the importance of such a scenario cannot be overstated. Through a simple online platform, or a smartphone app, borrowers can share their business plans, projections and books to get the right amount of financing they need.

Leaning on government regulations such as Aadhaar, Make In India, Digital India, Pradhan Mantri MUDRA Yojana and the India Stack, alternative lenders can also efficiently perform e-KYC activities to get all the borrower information they require. Just as e-commerce websites have revolutionised retail and the online shopping experience, alternative lenders are revamping the SME finance space with the help of customer-focused tools.

Various Types of Alternative Lenders

While many of these alternative lenders are still finding their way in a complicated market space, they hold immense promise. Here are some of the more popular alternative digital lending platforms that SMEs in India are turning to for financial support:

• Crowdfunding platforms – Built as online social hubs where SMEs can get piecemeal contributions from multiple lenders, crowdfunding enables borrowers to build credibility and a follower base that must be convinced of their capacity to deliver on promises.
• P2P lending – Peer-to-peer lending is a type of crowdfunding where SMEs can support each other without intervention from any formal or informal financial institutions. Run on modern platforms, P2P lending enables parties with extra cash to support SMEs in urgent need of an influx of finance.
• FinTech companies – Immensely popular in the country already, FinTech companies serve as an intermediary between traditional lenders and borrowers. They design consumer-focused platforms that are simple to use and share real-time data with both parties to make loan applications faster.
• Private equity – The idea of private equity and raising funds by being listed on an exchange market is not novel, but for an SME to derive finance in this manner is rare. This is better suited for more stable and long-running SMEs with proper books and effective profitability plans in place. But private equity does have the ability to change the financing environment if SMEs are willing to take on the challenge.
• Factoring mechanisms – A fairly new mechanism, factoring allows SMEs to auction off their accounts receivables at a discounted rate for immediate cash returns. The party facilitating the factoring transaction receives the accounts receivables at a later date and makes a profit, while the SME gets quick working capital to meet business needs.

With the advent of such platforms and lenders, the penetration of finance in the SME sector is receiving a tremendous boost. Financial literacy levels are rising, the credit gap is getting smaller, and SMEs are receiving working capital in time to meet their operational demands. Underserved regions are thus optimistic about economic growth, and the nation’s employment figures are going to rise further.

With so many clear advantages to gain, it’s no wonder that alternative digital lenders are gaining immense popularity in the SME sector, and they are emerging as long-term players.

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