SMEs in leading economies like China and U.S.contribute approximately 60 percent to the GDP of the country. This figure goes up further when we take in to account the informal SMEs operating in these economies. Compared to this, the Indian SMEs contribute a low eight percent to the GDP in spite of the number of Indian SMEs being ten times the SMEs in China and U.S. One would wonder why a sector which is looked upon as the game changer for the Indian Economy, the bedrock for innovations, an intrinsic cog in the supply chains of larger businesses, providing job opportunities which are second only to the agriculture sector, is failing to deliver its rightful potential.

World Bank lists access to timely and affordable credit as a key constraint to the growth of MSMEs in the emerging economies. This could not be more true for India, given the $5 trillion credit deficit facing its MSME sector. Lack of sufficient funds is also at the root of all the challenges this sector battles with - Inability to hold on to skilled labour, inefficient and redundant technology/ machines and lack or limited marketing and distribution resources.

Banks have shied away from servicing the sector as they have not been able to find a solution to their unique credit needs. Additionally, as most of these businesses need a line of credit in the range of Rs.50,000-200,000, servicing these small ticket loans is not a commercially viable proposition for the banks. The MSMEs have had to turn to Chit Funds, credit committees and other unregulated sources to fund their enterprises which came a texorbitant rate of interests.

The emergence of finance companies in the last decade which serve the MSME Sector has come as a break in the clouds for this vibrant sector. These companies have designed products, credit evaluation processes and distribution strategies which are tailor made for the MSMEs and address all the in extending economical loans to them.

These new age finance companies have cracked the code to MSME lending using some of the approaches mentioned below –

Digitalizing the Process: They have leveraged technology to ensure the sourcing, underwriting and delivery is made

more efficient and suitable to the unique needs of the sector. By entirely taking the sales process online, applying for a business loan has been made effortless. Also, as the credit choices and details of various products are made available online, it has made the selling process more transparent.

To understand better the businesses they lend to, the new age finance companies have deployed huge resources to research their operational levers

Additionally, most of the micro and small businesses have no credit history and little business documentation, which makes extending credit facility through traditional means a challenge. To negate this obstacle, finance companies have devised alternate underwriting processes that hinge on advanced analytics and a mix of human intelligence as well as machine intelligence, to optimize credit risk assessment. Psychometric tests and Social scoring. are enabling the finance companies to take a larger number of businesses into the ambit of formal lending.

Better Profiling: There are close to 50 million MSMEs spread all across the geographical expanse of India. There are manufacturers, retailers, service providers, dhaba owners, cattle farmers, fruit vendors, and general store owners. The list is endless. Profiling of these businesses poses a mammoth challenge. But profiling of customers is a critical step in decoding the credit worthiness of a business.

To understand better the businesses they lend to, the new age finance companies have deployed huge resources to research their operational levers. Some have gone well beyond the traditional classification of business into
Manufacturing, Trading & Services and segregated the businesses into ‘Industry Clusters’. They have built an in depth operational knowledge of these clusters by conducting an analysis of their margins, their credit habits and seasonal swings. This in depth understanding of clusters allows these finance companies to identify credit worthy
clients and approve and disburse loans efficiently.

Last Mile Connect: Majority of the micro and small scale businesses operate in the tier II and beyond cities of India. They have no access or awareness of their credit options. By creating an optimal low cost branch network which seeps deep into the hinterland, these finance companies have managed to make the last mile connect with the businesses. They have employed sales force from the communities in which these businesses operate to establish a comfort level with the borrowers. The borrowers feel more at ease talking to a familiar face, making the sales and post sales processes smoother.

Specialized Product Range: The Micro and small businesses have very distinct credit needs - the loan amount is small, and most of the businesses are seasonal. So, additional financial support is needed only prior to peek season to prime up their business and their cash cycles are much shorter than a large business. The new age companies have designed their product suit to cater to these unique needs. They also offer line of credit designed specifically for the products they manufacture or the services they deliver. Cattle loans, online - seller finance, taxi finance, bill discounting, and others, are all created to support the micro and small businesses.

It is said that the devil is in the detail. And unless a finance intermediary is willing to get the details of what
micro and small enterprise are, they will not have a chance in hell to get on top of the MSME Lending business.