Micro, Small and Medium-Sized Enterprises (MSMEs) are thriving in today’s age even with the dual throttles of demonetization and GST. This is why the credit to MSMEs is also expected to climb at 12-15 % over the next five years¹. It is also seen that the government has started a range of platforms to cater to MSMEs like MSME Sambaandh³ and MSME Samadhaan³. This all goes to suggest that MSMEs will witness better growth trajectories going ahead. In order to realize this potential and utilize the new set of opportunities that are unfolding in the business arena, MSMEs would need to work on all the aspects that contribute to its functioning. These include land and machinery, manufacturing processes, raw materials, human resources and capital. Of all these, capital stands as the most significant as it can procure all the other resources and help the MSME to stay afloat. Our work here at PrestLoans (www.prestloans.com) involves working hand-in-hand with MSMEs, trying to figure the best means of securing capital for them. With our experience and analysis that we will be presenting, we believe that small business loans that MSMEs secure from NBFCs like us, is their best option to secure capital.

Why small business loans are the best way to go for MSMEs?

1)      The credit demand is only going to grow- There are banks and then there is the government with its myriad NBFC-funding schemes (that are useful in their own right) but they can only do so much to cater to the unmet credit demand for MSMEs that stood at a whooping INR 25 trillion in 2017¹. This kind of demand cannot be met by the limited government schemes and the limited number of trustworthy banks that provide customized schemes for MSMEs. The answer is seeking out the expertise and finance of NBFCs who can quench the demand and inject the required capital in the market.

2)      NBFCs work better in the world of MSMEs- NBFCs are generally smaller organizations that have a niche in serving the need of MSMEs. This niche is what NBFCs specialize in and hone through years of experience. NBFCs ‘relate’ to MSMEs better since NBFCs themselves are generally mid-sized businesses themselves and know first-hand about the nuances of the business world. Their perspective is closer to the way MSMEs look at things. Hence, NBFCs have the skills and expertise and even the emotional quotient to work with MSMEs.

3)      Small business loans from NBFCs are customizable- The schemes offered by banks and the government work under fixed silos of governance and rules. For example, the government recommends that an MSME must have a project report comprising of a few specific points in order to qualify for the government schemes². While creating the project report is obviously a good idea, but making that rule apply to everyone may not make sense. A small business loan disbursed by a NBFC is more dynamically formed, without always adhering to a framework of rules for the sake of it. This kind of customization to the loan terms and requirements, depending on the loan-seeker’s specific business scenario works better for MSMEs.

4)      Small business loans build calculated, manageable risk- It is not just about working with NBFCs but the overall mechanics of small loans that are better suited to manage business risk than bulkier loans. Even though a series of small loans probably incur more interest than one big loan, a small loan can be taken at each stage of the growth and appropriately managed. A bigger loan can lead to wealth mismanagement if there are not sufficient channels to absorb it. A smaller loan can be put to better and more transparent use, which is a heathier option for an MSME.

5)      Smaller business loans are obtained more quickly- The opportunities to grow, when a business is at its maximal growth stage (which MSMEs frequently are) are quick to come and go. If an MSME undertakes a new project or secures a large piece of work or wants to develop a new technology before the competition does, then it would need to get a loan in a lesser span of time than what it takes to disburse a loan at traditional financial institutions. A small business loan is typically obtained more quickly at NBFCs like PrestLoans (www.prestloans.com) who apply advanced technology to automate credit checks, approval processes and other formalities. By using innovative operations, they further cut down on the loan turnaround time, which works harmoniously with the faster business arena of the MSMEs.

Conclusion:-

Small business loans are the most promising way for MSMEs to grow further and meet their capital demand. Contributing to about 45% of GDP4 (more than corporate India, interestingly) and employing 46 crore people⁴, MSME definitely need all the help they can from NBFCs to make their growth journeys successful. We at PrestLoans (www.prestloans.com) are committed to contributing to the success of the MSME sector in India, by our range of financial services and expertise.

Sources

1: https://economictimes.indiatimes.com/news/economy/finance/msme-credit-to-grow-at-12-14-over-next-5-years-icra/articleshow/63367465.cms

2: http://www.dcmsme.gov.in/howtosetup/guidenewssi.htm

3: https://msme.gov.in/

4: https://www.huffingtonpost.in/ankhi-das/what-the-future-of-business-survey-reveals-about-smes-in-digit_a_22137459/

The concepts of finance have always remained consistent with the times. The methods of executing financial services have undergone many changes though. Traditional finance relied on building a strong one-stop-shop with the entire gamut of services that an individual would need. With the Glass-Steagall act, commercial and investment banking separated for all times to come. But even then, financial institutions grew to be these giants that assumed powerful roles in the world. While there were investment banking corporations that controlled the space of investments and stock-broking, big banks controlled the overall lending and borrowing businesses. Fifty years down the line, we have different paradigms in the financial world that are also promising in their own right. These new paradigms are doing things differently and have newer business models and offerings that even challenge the status quo. The new age financiers are growing rapidly with the growth in technology and the growing need for a more customer-focused and dynamic service. As a new age financial company, we at Prest Loans (www.prestloans.com) decided to put together a list of how traditional finances compares against new age finance.

1)      Lending has more flavours in new age finance- Lending in the age of traditional finance consisted of two kinds. One was the lending done by banks which was under high scrutiny, regulation and process governance. The other was helmed by ‘loan shark’ who operated under the radar who often charged unreal rates of interest and resorted to any means necessary to recover their sum. The new age of finance has Non-Banking Financial Corporations that bring the regulated culture of banks but being dynamic like the loan sharks. NBFCS are actually doing better than ever in India, with the current market share for NBFCs for Micro, Small and Medium Enterprises (MSMEs) at 18% which was 8% five years ago¹. PrestLoans (www.prestloans.com) is one such NBFC, doing well in the age of alternative lending.

2)      Technology plays a much bigger role for new age finance- New age finance relies on technology to deliver a better financial output to the customer. The application of technology in traditional finance has been legislation driven. The application of it for new age finance has been the desire to innovate and do better. Hence, new age financial players can be seen using the help of FinTech in automating processes, easing the application process, automating credit checks and increasing transparency.

3)      New age finance looks at customer loyalty in a very different way- Traditional finance relied on long-term relationships and nurturing them with many methods other than providing traditional finance (the tradition of gifts etc. for customers runs to this day). New age financial firms, while working on their own long-term relationships, realize that the modern customer’s loyalties are easily swayed. A modern customer would happily switch e-Wallets or NBFC or banking service if he or she gets a better and more relevant experience. New age firms have hence worked to build that compelling experience that wins them  customers all around the world, without them physically being in touch with every customer.

4)      New age finance builds experiences over building products and services- New age financial firms often talk about ‘the perfect experience’ rather than their products and services. In sharp contrast to traditional finance, the new age players simplify their core message for the end customer. They only focus on conveying the value that they really add without talking about what products and services do they offer. Talking about experience and concentrating on that, is a great way to build customer confidence today.

5)      New age finance is using the newer trends like block-chain- Block-chain is looking to revolutionize the concept of financial ledgers and the authority of banks. By decentralizing ledgers and storing distributed copies (that are hence very secure) the concept of all money in one place could go away. While this puts the business model of traditional institutions under great peril, new age firms are finding it easier to embrace the trend and leveraging it.

6)      New age financial firms are smaller and more agile- A new regulation like the GDPR in Europe² or the open banking regulation³ shakes the corridors of traditional players. New age players are smaller and can adapt to these regulations in a much quicker manner. They can take bolder decisions and use smarter technology to actually utilize the opportunity. A classic example is the demonetization wave causing a lot of trouble to banks but e-Wallets like PayTM and Free-Charge bloomed. More recently, while banks find the business lending market stifled due to dual GST, new age lending firms like PrestLoans (www.prestloans.com) are using it to their advantage to help MSMEs secure better credit.

Conclusion

We would also like to highlight that an old player is not necessarily traditional and a new firm doesn’t automatically become ‘new age finance’. It is a question of mindset and methodology and changing of deeply set ways that decades of financial markets have taught us. The best thing that a larger player can do is partnering with a smaller firm like a FinTech company that can provide a particular product or service which can give an edge to the bigger player. With a thoughtful approach to finance, using technology and keeping user experience at the center, a traditional financial company can mould itself to be a formidable, new-age player.

Sources:

1: https://www.crisil.com/en/home/our-analysis/reports/2017/12/nbfcs-a-special-report-by-crisil-research.html

2: https://gdpr-info.eu/

3: https://www.cnbc.com/2017/12/25/psd2-europes-banks-brace-for-new-eu-data-sharing-rules.html

The lending sector in India has always had two distinct segments in operation. The standard lending segment is run by banks that offer loans for your business or for your personal needs like buying a house, a car etc. Then there is the alternative lending sector which has historically relied on securing credit from members in the community or self-professed lenders in the area that lend with almost credit-checks but who charge much more than the bank rates. A strong third player is also emerging (which actually belongs to the alternative lending sector) in the form of Non-Banking Financial Companies. These firms are sort of taking the best from both worlds and giving banks a run for their money (pun intended). But even then, the lending sector in India still needs to address a credit supply gap worth USD 200 billion¹!

The FinTech industry in India is growing at a steady pace that even beats the numbers worldwide. The expected (ROI) on FinTech investments in India is 29% against Asia’s 25%¹. This growth in FinTech has had an impact on the lending sector for the better. The financial pundits at Prest Loans (www.prestloans.com) have analyzed why FinTech will have the biggest impact on lending and here are their reasons.

Reasons for FinTech’s impact on lending

1)      There is strong government support for FinTech- The Indian government has been very clear on its stand on digitization and digital currency. It is little surprise then the government has launched the ‘Startup India Program’ to nurture and help young start-ups to grow (there were 158 start-ups in the alternative lending space in 2016 alone²). Start-ups can quickly build the technology that can then be used by traditional financial institutions who themselves may not have the agility to build new technological capabilities. The government has also announced the ‘Jan Dhan Yojana’ which aims at reducing the population that is unbanked or underbanked. The National Payments Council of India (NPCI) has also introduced a number of moves to facilitate payments (like the RuPay cards, UPI, BHIM) which sets a good example for the other sectors to adopt technology.

2)      The regulations coming in can be best addressed by FinTech- The introduction of Aadhar and the ubiquitous linking of it to almost every asset one has, brings greater scrutiny into the financial sector. The growing regulations will stifle out unregulated players who operated as per their own will. But this push for regularization will only help the lending sector, if it adopts FinTech to    automate identity verification, KYC and AML checks and fetch credit scores to disburse a loan, thoughtfully. The days of ‘loan sharks’ are coming to a slow end.

3)      Emergence of technology as the all-pervasive medium- It is not just the government but technology in general that has become all pervasive. The functioning of ANY sector today, and not just lending have to take note of the growing digital penetration in India. The number of smartphone users in India is projected to grow to 500 million users by 2020 compared to 150 million in 2016. This makes it obvious that any new service, lending or otherwise needs to be technologically enabled. The establishment of ‘India Stack’- the largest open API in the world that is aimed at creating presence-less, paperless, cashless service delivery ran a pilot by attempting to solve the problems of loan disbursement. This is testimony to the fact that India’s financial sector is truly going digital, with capabilities like the India Stack which weren’t there before.

4)      Banking technology is gearing for its next revolution- The primary lending sector could also see quick adoption of FinTech if current banking technology is anything to go by. Ever since banks underwent their digital transformation in 1991 due to legislations pushing for MICR, e-Transfer  etc. the industry has been technologically stagnant but the current players have started taking technology seriously, which is why we have HDFC Bank and the Fintech startup, ‘Tone Tag’

partnering to provide phone-based proximity services and Yes Bank teamed up with

Ultracash Technologies to design sound-based proximity payments. These trends by the big players will push everyone (including lenders) in the sector to take up FinTech more seriously than ever.

5)      Growing interest by investors- Goldman Sachs had announced potential investments of up to USD 10 million in the FinTech start-up scene back in 2016. Barclays and Citi and much closer to home, SBI, ICICI Bank, RBL, Axis and many other large banks have set up innovation hubs or accelerator programs to attract FinTech startups. Other VC firms like Sequoia, SAIF, Matrix Partners, IDG have also expressed interest in the FinTech sector and the investments continue to grow which will sustain the FinTech sector to revolutionize lending.

Conclusion

The lending sector in India will see impressive growth in the times to come and FinTech will play a big part in that growth. New age NBFCs like Prest Loans (www.prestloans.com) are already using FinTech to execute better credit scoring, faster approval processes to build a more memorable customer experience. Their efforts in adopting FinTech will be key in propelling the lending sector in India to heights, never seen before.

Sources:

1: https://www.pwc.in/assets/pdfs/publications/2017/fintech-india-report-2017.pdf) 

2: https://www.swissnexindia.org/wp-content/uploads/sites/5/2016/10/Fintech-Report-2016.pdf

The MSME (Micro, Small and Medium Enterprises) sector in India has been formidably shaken with the ripples caused by demonetization. While the sector, tottering at 6-8% growth versus the earlier projected 14-16% growth (source: https://www.thehindubusinessline.com/opinion/how-will-gst-impact-msmes/article9702208.ece) continued to recover, it received another shocker- the introduction of the Goods and Service Tax (GST). This new system of tax replaced the old Value Added Tax (VAT) and the cascading taxes levied at various levels. With a twin tax system (called CGST and SGST for center and state respectively) replacing every tax out there, it was intended to unify the system of taxation and bring uniformity in business transactions. However, it was immediately perceived as a measure that wouldn’t augur well for the small business sector. But is that really true? A deeper analysis done by the financial analysts at www.prestloans.com reveals that there are indeed two sides to the coin.

Impact of GST on tax evasion- MSMEs must stay tax compliant to continue smooth operations

The MSME sector in India is famously unorganized which includes copious attempts to evade taxes. These attempts include understating the number of employees or fudging turnover numbers or running different ventures under different names to not reach the tax thresholds. Under the provision of GST, the compliance is a three-way aspect with scrutiny, audit and anti-evasion being included in it. The whole process of registration is also digitized. This means that the evasion that enabled MSMEs to price their products and services more competitively won’t be in effect anymore. This will level the playing field and force the players to consolidate their ventures into a single GSTIN number. The threshold for goods providers has also been reduced from the former INR 1.5 crores to INR 20 lakh which is intended to bring the smaller players into the tax fold.

Impact of GST on ease of doing business- MSMEs can utilize input tax credit to reduce GST and get ahead of the competition

With dual GST and the associated digitization in place the procedure for registering a business is easier than ever. The process of reporting tax is also much easier than before, where it is clearly demarcated that goods providers beyond the INR 1.5 crores threshold deal with the State while the smaller ones deal with the center. Additionally, there is no entry tax for good sold at any part of India. Varying state entry taxes has discouraged goods’ mobility in the past but this won’t happen anymore. There is also no differentiation between goods and services when it comes to compliance. This helps businesses work with less confusion and difficulty, since the legal framework can be more easily applied. With GST, businesses can utilize the concept of input tax credit (the amount of GST on the original price of the goods will be subtracted from the total GST) to reduce the GST paid if they are GST-compliant. By hiring a tax consultant to figure out input tax credit and other aspects, businesses will stand to reduce taxes in the GST era.

Impact of GST on digitization- MSMEs need to invest in technology and understanding it to stay ahead in the era of dual GST

GST is obviously big on digitization. This entire move is intended to bring businesses and the data about their operations into a single, searchable archive. The digitization process also includes invoice matching, where businesses must have GST-compliant invoices to claim the benefits offered under GST. MSMEs must invest in understanding technology or hire the necessary personnel to do so. It would also be prudent to invest in a compliance software that can take care of many tax-tracking processes in a seamless manner.       

Impact of GST on lending

It is also worth-noting that most lenders whether banks, old NBFCs or new age online lending NBFCs like www.prestloans.com assign importance and weightage to businesses who are GST compliant. GST compliant MSME and small business would surely get better credit scores and hence access to credit on better terms.

Conclusion and summary

It is rather difficult to gauge the impact of GST without giving it fair time. But at the outset, the dual GST policy will improve tax compliance, ease the process of starting a business and press on the need for tax literacy and technology. To summarize, we would quote Mr. Bibek Debroy, the author of 'On the Trail of the Black: Tracking Corruption’ on GST, ‘Here we have to have a dual GST. So sitting in this position of uncertainty, I take some decisions and sitting in the same position, you might take a few different ones. In hindsight you always realise you could have taken better decisions whether it is I sitting in this chair or you sitting in this chair." (Source:  //economictimes.indiatimes.com/articleshow/61876194.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst).

The online lending landscape has undergone a tumultuous change in the past few years. The people started taking this industry in a more serious spirit when RBI published this paper, https://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=3164 on peer-to-peer (P2P) lending back in 2016. In the present day and age, there are many companies that are offering platforms to facilitate P2P lending via the internet. These platforms are growing which is shown by the fact that NBFCs (the sector which these platforms belong to) is accounting for almost 10% of all financial assets. (source: http://www.careratings.com/upload/NewsFiles/SplAnalysis/P2P%20lending%20in%20India.pdf) These platforms are taking the advantage of the fact that India has always survived on a rich, people-to-people based banking system long before banks became common place. Even now, banks have their own problems with the lasting impact of demonetization on loan fluidity and the usual delays and formalities that is typical to banking. In the face of all this, the online lending landscape continues to grow.

Here are five facts to know about this arena that explain why this industry is the next big thing.

Five facts about the online lending landscape

1)     It is growing as an investment option

P2P lending is emerging as an attractive investment option for investors of all segments in India. P2P lending allows the common man to invest in the projects or aspirations of another common man. The important factor here is the platform that evaluates the needs of the loan-seeker and the application and adjudges it to be a healthy one to invest in. The evaluation builds trust amongst investors and encourages them to invest their hard-earned money.

2)     Growth of the social score with the credit score

Banks have traditionally been evaluating applications with a credit score. The new breed of NBFCs have started incorporating the ‘social score’ element in the mix. This score is assigned on the basis of the social relevance of what the borrower may be doing. Even if the credit ratings might be low, if the borrower’s work is socially significant, there are chances of the borrower getting more funding as his project grows. This combination of social scores and credit scores is being well utilized by online or digital lending platforms like www.prestloans.com to adjudge loan applications in a much better manner.

3)     Importance of FinTech

A platform for online lending employs web-based information technology to conduct its operations. But that apart, players in this landscape are using sophisticated algorithms and cutting-edge technology infrastructure to reduce the loan processing time and increase the accuracy of evaluating applications. This kind of agility is very important to this sector and any player here leverages technology today to maintain that agility. FinTech is also going to determine the ease with which a platform engages its audience, which impacts the experience and the overall conversion rates.

4)     MSME will greatly benefit from the online lending

MSMEs have operated in a manner that has always been at loggerheads with the slower, more methodical system that banks are known for. The time that it takes to process an application, the overarching reliance on credit scores don’t augur well for MSMEs. Hence these businesses are greatly benefiting from the more flexible and quicker loan options that online lending is bringing in. It is little surprise that the MSME sector is also sporting a growth trajectory that is similar to the other NBFCs are witnessing.

5)     More regulations and interventions will come in

The RBI has already started rolling out regulations for NBFCs. RBI introduced ‘directions on managing risks and code of conduct’ for NBFCs on November 9, 2017 (https://rbi.org.in/Scripts/BS_ViewNBFCNotification.aspx). The RBI updated the same regulations on February 23, 2018 which highlighted the necessity of getting a NBFC registered with the Department of Non-Banking Regulation. There also emerged regulations about the “prudential norms” that included maintaining a cap of INR 10 lakhs as the aggregate exposure of the NBFC: P2P. There are also guidelines related to the transparency and disclosure requirements and fair practices. There have also been recent guidelines that spoke about “a system of Ombudsman for redressal of complaints against deficiency in services concerning deposits, loans and advances and other specified matters”. While this sector is more unregulated than banking, which has mature regulations in place, the growth of this sector and the government’s increased interest in digital India is going to attract more regulations from the RBI for NBFCs.

The online lending landscape is still taking its nascent steps. The industry will take a lot more time to grow into a sector that competes with banks as an equal player. But even then, technological advancements and the general growth of interest in it has already placed it on the map. As more individuals and businesses use the online lending mechanism to borrow money and to make investments and as new technologies and regulations come in, this sector will shape up to assume a form that will only grow in the time to come. Amongst the most promising NBFCS, is Prest loans (www.prestloans.com) which is also one of the fastest growing online lending NBFC for small businesses and MSMEs.

Introduction

India has always been home to a vibrant spectrum of microenterprises even before that term became popular in mainstream economics. The small business sector in India is deeply rooted in familial customs and niche skills. Today, that sector has been recognized as a legitimate business sector with its own set of nuanced workings. This sector now includes 51 million microenterprises, each with its specific need for credit. These microenterprises were traditionally not financed by banks due to the need of too many financial documents and credit records.  Non-Banking Financial Corporations (NBFCs) are offering more interesting propositions to these microenterprises. NBFCs are playing an increasingly important role in the growth of microenterprises.

Why microenterprises favor NBFCs

Microenterprises are generally categorized under the riskier borrower segments of banks. While many banks have their own MSME (Micro, Small and Medium Enterprises) divisions, their drive towards evaluating the low-credit health applications of microenterprises is limited. The reason for the low-credit health is the non-availability of the traditional means of collateral. NBFCs are however, more innovative towards the evaluation of the credit risk. Factors like the business stability (which may be undocumented), family repute, product idea or market monopoly are hard to weigh on a credit scoring scale. NBFCs today carry the expertise and the technology to evaluate these seemingly unquantifiable parameters and arrive at an informed decision about the credit health of microenterprises. The banks generally fail to make such judgments or find the loan application to be too risky by their measures.

 Due to this difference in the approach towards lending, the banks’ total share in the loan market fell from 49% to 28% according to a report (https://www.bcg.com/documents/file15284.pdf) by the Boston Consulting Group. The same report also states that the share of NBFCs rose from 21% to an impressive 44%. This happened in just three years, between 2014 and 2017. 

NBFCs are also being favored by the younger entrepreneurial populace, which has taken a liking to the lesser bureaucracy and flexibility of NBFCs. The same report states that NBFCs had the lion’s share of the market for loans to persons aged between 21 and 35, at 49%.

Why NBFCs favor microenterprises

Most microenterprises seek loans under project finance, equipment finance or loan against property (LAP). In these three categories, LAPs are the most popular amongst microenterprises, where the business owner’s residential or commercial property is put up as collateral. The rate of delinquency for microenterprises are in the range of 7.4% to 8.1% as against the much more discouraging figures of 12.25% to 22.3% for large corporates. This is ironic because, microenterprises get routinely turned down to their perceived credit health issues, the keyword here being ‘perceived’. NBFCs favor microenterprises because they have the analytics to tell them the real story and not just consider the presence of large office space or employee strength.

NBFCs are also generally working with lesser opex, more flexibility and greater agility. These factors lead to NBFCs being comfortable with the microenterprise lending arena, which would generally discourage a bank. Microenterprises also offer partnership options or profit-sharing options to NBFCs that seem attractive because of the entrepreneurial spirit that NBFCs yearn to kindle. These kind of benefits are different from the traditional money-lending advantages, that NBFCs make ample use of.

The introduction of the Goods and Service Tax (GST) is a move that has placed the transactions of many undocumented microenterprises on the map. NBFCs are able to view the business activity of a microenterprise with much greater clarity than before.

NBFC 2.0 are attracting more microenterprises

The marriage of financial technology and the existing set of financial services that NBFCs provide is churning out more futuristic companies that are said to be a part of NBFC 2.0. These companies are using a mix of different analytics’ tools to conduct their credit health check. By checking the website traffic of the microenterprise, the social media activity, the track record of the entrepreneurs, the innovation introduced in the product or service, NBFC 2.0 is processing loan applications at a much quicker pace. This is helping the growth of microenterprises which in turn feeds back to the growth of NBFCs. NBFCs are also growing in terms of technology and expertise and not just size. This growth is helping them become better at providing financial services to microenterprises.

Conclusion

NBFCs will continue to do better in the microenterprises’ arena compared to their banking counterparts. They already have a competitive market share that is only expected to grow as microenterprises become more familiar to the nation and the economy.

The quickness to respond, utilization of technology, analysis of non-standard credit health aspects and desire to innovate will make NBFCs, preferred choice for credit for microenterprises.

Prest Loans (www.prestloans.com) is a new age Fintech NBFC that uses technology and analytics to provide easy finance options to MSMEs.