Making SME Financing a Challenge of the Past


SME financing is not a new challenge, it is also not a challenge unique to the Indian financial sector. Today, extensive research is being done on the Indian SME sectors’ creditworthiness and its ability to repay loans, and almost every stakeholder in the banking sector has been trying to crack this market segment.

To add insights to this existing conversation, Access Development Services hosted the Inclusive Finance India Summit 2023 on the 17th and 18th of January. The Summit is an annual global convening aimed at promoting dialogue and enabling action to achieve financial inclusion in an empathetic, inclusive, and responsible manner. This year, we partnered with Access as one of the summit’s Technical Partners to host the panel titled ‘Financing the SME Segment – Overcoming the Supply Side Challenges’ to delve deeper into accessible SME financing.  

Moderated by CreditEnable CEO and Founder, Nadia Sood, the panel enjoyed participation across all stakeholders of the SME financing sector. Panelists included Mr. Bikram Bir Singh, Business Head, Experian Credit Bureau; Mr. Aditya Harkauli, Chief Business Officer, Indifi; Ms. Divyashika Gupta, Group CEO and Managing Director, Stalwart World; and Mr. Vibhor Jain, Chief Business Officer, CreditEnable. The insightful discussion gave us a glimpse into the challenges different stakeholders face when financing the New-To-Credit (NTC) SME segment as well as what each stakeholder is doing to make formal financing more accessible to SMEs.

On including more New-To-Credit SMEs in the formal SME finance sector

SMEs need fast and efficient access to capital as their daily operations rely on their working capital cash flows. However, 84% of the 65M SMEs in India still don’t have access to finance. SMEs who don’t have a commercial data footprint are ineligible for loans, and while regulatory bodies are doing a lot to help SMEs, they still face the challenges of recognizing businesses that are unregistered or New-to-Credit (NTC). To overcome this challenge, CreditEnable CEO and Founder, Nadia Sood, stirred a discussion around enabling SME financing with the respected panellists.

While Credit Reports look at a borrower’s credit history, Indifi’s Aditya Harkauli highlighted that a possible solution to help NTC SMEs build a credit history to gain access to SME financing could be to look at their unstructured data like utility bills, electricity, and internet bills. CreditEnable CBO Vibhor Jain added that even a person’s location and how often they change their home address might be a valuable parameter, giving us insight into the borrower’s financial behaviour.

Aditya Harkauli also insightfully shared that learnings from the underserved segments can help with insights for NTC borrowers. But how can the unserved become at least underserved? Across India, there are SMEs that have immense potential but no credit line, leading to their business dream stagnating at pivotal moments. One way to overcome this challenge, according to Stalwart World’s Divyashikha Gupta, is by using the Business Model to determine the creditworthiness of an SME. By leveraging data of this kind, it may be possible to convert the unserved into the underserved, and over time, achieve complete access to SME financing for all. Entrepreneurs often struggle to establish their business vintage, so considering data of this kind would be worthwhile until, as Nadia added, a more formal footprint can be created.

On using innovative data points to establish NTC creditworthiness to get SME financing

Of the 65M SMEs in India, only 25M have a credit history. But simply having a credit history does not make an SME creditworthy, explains Bikram Bir Singh from Experian. The quality, frequency, and consistency of the data reported by lending institutions allows credit bureaus like Experian to accurately assess an SME’s creditworthiness. In the recent past, there has been a regulatory push from the RBI to consistently follow up with credit bureaus to hold lenders accountable for their reporting patterns. This is helping improve the timeliness of the reporting and the quality of the data bureaus have access to. This also helps avoid over-lending to SMEs who may have applied to multiple lenders, while aligning funds in a way that NTC SMEs finally get the necessary access to credit.

Another innovation that Divyashikha mentioned was reducing the rate of interest as the SME grows and reaches a certain level of MRR (Monthly Recurring Revenue). This is something more mature economies have already done. Additionally, RBI’s co-lending guidelines could also be explored and enhanced to further support SME financing in India.

While using alternate data to prepare a credit profile of NTC SMEs can become a viable solution in the future, at present, there is a lack of reliable data points. The frequency at which these data points are updated also becomes a challenge as Credit Bureaus need the most up-to-date and authenticated information about a consumer or a business to determine their credit profile. Without this, they end up relying on the consumer data of many NTC entrepreneurs to determine creditworthiness.

On increasing SME financing awareness to improve NTC creditworthiness

Another aspect of SME success is awareness. Divyashikha highlighted the need to understand what an entrepreneur signs up for when they start their own enterprise – hard work, dedication, endless sleepless nights, and a constant worry of working capital. At CreditEnable, we know that running a business by itself is hard and comes with a lot of challenges. But in this arena, documentation is a game that has always been a losing battle for the average SME. All their hard work can amount to nothing if they don’t have the right documentation and registration in place from Day 1. This lack of awareness leading to missing documentation also pushes many SMEs towards informal money lenders who charge them up to 200% in interest.

In India, barely 20% of SMEs are GST-registered, making it difficult for lenders to lend to them. Those not eligible for GST may still not possess the right alternative documentation to make them viable customers for a lender – some registered SMEs may have handwritten business documents while others still lack appropriately notarized documents.

Divyashikha mentioned that trial and error is generally how small businesses figure things out for themselves. But for many, it may be too late by the time they figure it out. So, some education and guidance at an early stage in their entrepreneurial journey about seed and growth capital, and other business-related issues is crucial.

Another thing all panel members agreed upon that would significantly improve SME financing is making technology more accessible. We’re already seeing some of these tech-enabled changes, like digitized payments using UPI, drastically change SME capital flows and recordkeeping.

Lenders in India are also yet to extensively explore credit-building products for SMEs, which is something that FinTech companies and other stakeholders can co-create with banks. As CreditEnable, we are contributing to these credit-building innovations and hope to enrich the SME finance landscape in India together with our lender partners. At the end of the day, as Aditya Harkauli put it, it’s the accessibility and the intent to pay that’s important, and we believe that we can help in establishing the two using alternate data and AI.

On empowering NTC SMEs to overcome these challenges

When it comes to SME financing, it’s important to get the lender and borrowers working together because, as Divyashikha put it, it’s fashionable to start a business but also fashionable to sustain it. One way to do that is by overcoming information asymmetry when it comes to borrowing. Applying for a business loan process in India can be confusing and daunting, somewhat like a black box. If an SME borrower is rejected, they’re not told why, so they don’t know what they can do to correct the problem. Instead, educating NTC SME borrowers on their shortcomings to improve their creditworthiness is critical.

To further improve SME financing, lenders can also work with SMEs to develop realistic financial plans for their sustained growth and success. When SMEs have a clear understanding of how much capital they need, they’ll be able to plan and make business decisions accordingly. Vibhor Jain also stressed the need to help SMEs with clear non-jargon-heavy financial knowledge. This literacy begins with knowing exactly what documents they’ll need to simply apply for the loan, and it involves at least a basic understanding of the underwriting process and what lenders are looking for in a creditworthy enterprise. This is exactly what CreditEnable is doing to make business loans easier, faster, and more accessible for SMEs. CreditEnable gives borrowers detailed information about their creditworthiness, and our team is helping NTC borrowers understand what their loan terms mean and negotiate with lenders for terms that work best for the SMEs and their business models.

On the way forward

In conclusion, the solutions to the challenges the SME financing sector faces in India lie in technological innovations and partnerships.

In India, there isn’t a lack of data on SMEs, but legacy financial institutions often don’t consider it to be adequate. India is still a cash-dominated economy, which adds to the challenge of creating a digital commercial footprint for SMEs. However, as Aditya Harkauli put it, from a lender’s perspective, innovations such as UPI have been helpful in establishing commercial data for SMEs. Lenders find comfort in having a digital train of payments, which might be helpful in getting the much-needed financing that SMEs need. Another solution is considering switching from EMI-based financing options to Lines of Credit for NTC SMEs.

Udyam, according to Bikram Bir Singh, is another great intervention as it is helping accumulate fragmented data for lenders and Credit Bureaus.

More partnerships between stakeholders in the sector – banks, NBFCs, FinTech companies, and SME organizations – will also aid the development of better credit-builder products for SMEs and make their entrepreneurial dream a success story. As CreditEnable, we are adding to these innovations and hope to drive further expansion of the SME finance landscape in India.