How fintech players are helping SMEs chalk out a progress path with easier trade finance?

The MSME segment may contribute 40 percent to total exports in India, but it often finds itself in dire straits as far as financing operations is concerned as only 16 percent have access to formal credit.

While access to formal credit has always been a stumbling block for MSMEs, the problem has taken on acute proportions in the era of the pandemic.

Robust, reliable suppliers and distributors with a long history of operational accountability were found running pillar to post, seeking to mobilise working capital funds. The dismal state of financing in this segment speaks volumes about the desperate need to reinvent and reimagine the extant dynamics in the credit-lending space in the country.

Why do banks turn away from financing SME operations?

The unit economics for operating in this SME segment do not find favour with traditional banking and formal lending architecture. While on the one hand, banks aggressively push financing products for individuals and large corporates, the same enthusiasm is distressingly absent when it comes to MSMEs.

Smaller firms receive the rough end of the bargain. Banks turn away from financing them thanks to stunted margins, higher operational risks, and bigger underwriting costs.

Compounding the problem of the deficit in financing is the absence of a singular database that provides a bird’s eye view of an SME’s operations neatly summed up in a single internet browser tab.

Trade information on SMEs is currently split between multiple regulators and it is an onerous task for bankers to collate this data and take an intelligent decision on credit disbursement.

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How can fintech companies be game-changers?

This information gap between the banks and the end customer can best be bridged by fintech intermediaries. Fintech companies have the requisite intellectual capital to design sophisticated credit disbursement tools that can measure the credibility and operational soundness of an SME on several parameters.

Easy and immediate access to this data can help banks and other formal lenders step in and take quicker decisions on disbursement to specific SMEs. What’s more, repeated exposure to such an account aggregator framework will push SMEs to step up their compliance and documentation track record.

Once integrated into the formal banking ecosystem, SMEs can keep pushing the ante when it comes to integrating with their business practices to best comply with the needs of the lenders.

Fintech players understand very well that they have an edge here over the traditional banking schematics. By a deft application of artificial intelligence, machine learning tools, and big data analytics, fintech players have access to data-based intelligence that is not being pieced together by the likes of legacy banks.

Generating and accessing this data will aid fintech players in accurately pricing in credit risks and in underwriting cases that may not be entertained by banks.

Additionally, the account aggregator framework can be designed to gather publicly available GST data. This will aid in drawing up the business history and credit profile of an MSME when it comes to determining its creditworthiness. Tapping into GST data can help create new products that drastically reduce the loan-processing overheads and will help open up a market for cash-flow based lending for MSMEs.

The times, they are a-changin’

SMEs have reached an inflection point. Many of them are poised at the cusp of exponential growth, provided they integrate their internal systems to best meet the demands of a cumbersome formalised system. Here, fintech players as intermediaries can veer SMEs into re-engineering their business into more accountable, structured units that inspire greater trust and consequently welcome higher credibility.

Higher liquidity and a larger order book can help SMEs expand their financial heft while the fintech agent involved can continue to resolve bottlenecks and barriers on credit risks and underwriting problems.

Fintech players can also shepherd SMEs to move up the ladder by initially assisting them with smaller loans and gradually disbursing bigger loans, effectively catalysing their operations to greater heights.

As the customer portfolio of a fintech player expands, legacy banks will be keen on tapping it for access to reliable and trustworthy SMEs. A trifecta like this is a virtuous ecosystem that benefits all players.

Banks can set up business ties with premium SMEs with a stellar credit history while SMEs get access to enhanced liquidity on their path to greater growth. Meanwhile, fintech players earn social currency in terms of customer loyalty and get to see an expanded customer base of their own.