Unsecured SME Loans – Reimagining digital journey
Recently, BCG has released a report on Digital lending in India and estimated the digital lending market to be $1 trillion over the next five years*
. There is no doubt that more and more SME businesses are evolving in India and they are looking at financial institutions for easy access to credit. The biggest question is that are Indian Financial institutions ready to tap this market?
Imagine this, an SME business applying for a loan from a financial institution. Most of SME lenders in India don’t accept applications digitally. SME business needs to look for sales agent and submit hard copy applications along with hard copies of required documents. Most of the SME business falters in this step. Imagine an online business (virtual setup) asked to provide ‘Shop establishment certificate’ from municipality because this is one of the required documents of the lender. The next step is ‘Physical verification and valuation’. Business owners must call financial institutions to schedule a verification agent to visit their premises. It becomes very difficult for small business and young entrepreneurs to keep abreast with the lengthy and cumbersome process of applying for business finance.
Where exactly financial institutions miss the plot in terms of the unsecured business loan?
• Lack of Innovation
– Though a lot of fintech lenders have emerged in this space, there are no innovative products aimed at tapping new-age young entrepreneurs.
• Inconvenient process
– SME business from tier 2 and tier 3 cities in India apply through sales agent and don’t have negotiation power. It is estimated that the average turnaround time for lenders is 12-15 business days which is huge for SME business.
• No Digital Journey
– Customers across segments are digital ready and most of the loan seekers are ready to buy loan ‘online’ but lack of awareness on the exact digital processes or digital lending platforms to applying for loans
• No personalization
– Customers are looking for product/ service tailored to their specific context. They want a better rate of interest, or more favorable loan repayment terms basic their business scenario.
DIGITAL FOOTPATH FOR LENDERS
As companies embark on this opportunity, it is critical to get few things right to develop the organizational and technical capabilities of the future. Innovative Products:
Emergence of new age technology similar to LendFoundry, enables lending companies to design new loan products that are meant to fulfill varying business needs. New age digital lenders can offer innovative products like the point of sale-based transaction lending product, merchant cash advance, online seller loan, supply chain financing to tap youth entrepreneurs. Simplified process:
Application process should be simplified for businesses with minimal important details captured. The Indian consumer is ‘digital ready’ across loan product categories. Instead of visiting a branch in person, they can apply for the loans from anywhere and at any time. Lenders should stop asking for heaps of paper-based documents rather they should encourage borrowers to upload minimal documents on the encrypted portals of lenders.
For instance, Lenders can ask borrowers to link their bank accounts through their encrypted portals to pull banking transactions digitally. This will save a lot of time for both lenders and borrowers. Few additional initiatives could be e-KYC, e-sign, and digital fund disbursement. Personalized Underwriting:
Imagine an online seller’s creditworthiness is being assessed only on their financial statements – this way the lenders will not have the comprehensive evaluation of credit risk. With the aid of complex analytic tools and data aggregators, lenders can extract data from different data sources including tax authorities, their digital footprint on social media, e-commerce platforms, smartphone usage and geo-location, utility companies etc., and aggregated to generate a risk score of the business. This concept of credit risk evaluation of a business is further customized as per the nature of a business and product being offered by lenders. Transform Customer Journey:
To redefine customer journeys, lenders must build new digital capabilities to maintain seamless, paperless, customer-centric lending experience for customers and in the process expand the scope of credit to those underserved segments. An important step in this is communicating and educating the potential customer base. For Instance, Identity verification could be faster and more efficient with the use of Aadhar based e-KYC. A better e-Sign mechanism will help lenders fasten loan process and will ease recoveries. Instant digital payments will continue to drive real-time disbursements and improve collections.
The points outlined above could well serve as a basis for end-to-end digitization of SME loan journey. As lenders embark for digital transformation, it is critical to get a robust and scalable technology platform for sustained competitive advantage.