Digital Lending and Its Impact on SMEs in India

An instant fund is an important requisite for any business which is looking for a quick breakthrough into the market and in a fast-moving market segment which comprises of the Small and Medium-sized Enterprises it’s one of the important things that they look forward to. The rampant growth of the start-up culture in India has increased the demand for loans which are fast and flexible for the quick functioning of their business. Finance is needed to get an organisation started, and a fast method to procure it will make the business a smooth affair.

But loans and the different lines of credit are processed by banks which follow a traditional path which take a long time-period for sanctioning and processing the loan amount because of the detailed and time taking paperwork process, unnecessary processing fees, high rate of interest on the principal amount which you have to repay over a period. All these factors discourage an SME to opt for these loans as these time-taking solution will have an adverse impact on the functioning of the business.

Seeing the growing need of instant credit from these organisations, an alternative method has gained momentum in recent years. This new system which has made life easier for small business owners is known as Digital Lending.

What is Digital Lending?

Lending is the process of giving money to a borrower on credit which the borrower has to return over a defined time-period along with a certain rate of interest. The borrower uses this money to buy a house, to buy cars, for educational purposes, etc. The lending process for a lender starts with obtaining a borrower through various promotional channels and then assessing that particular borrower by scrutinizing their ability to repay the loan amount by going through their credit history and CIBIL Score.

The offline lending process requires paperwork and some time is taken to process it due to the involvement of manual labour in it. You have to go through a lot of documents such as proofs and KYCs which take up a lot of time.

Digital Lending follows the same process on the digital platform by allowing the lender to submit the required documents on to the designated portal and thereby ensuring a fast disbursal of funds. Now with the introduction of e-KYC, the tasks have become a tad easier.

This whole spectrum of borrowing and lending and availing of other financial services over the internet is known as FinTech (Financial Technology). As per reports, this industry is going to touch a 3 billion mark by 2020 in India. This model is also gaining ground in our country also because of the rapid digitisation happening in our country.

Why do SMEs prefer this spectrum of financial institution and technology over conventional sources of finance?

SMEs had to face a lot of problems while availing credit through conventional methods because of the long process involved which consisted of elaborate and time-taking paperwork and taking the loan in the secured format which required to keep a reserve or any fixed asset as collateral which didn’t prove viable for them. This proved as a roadblock for many ventures which had the potential of optimum growth and who could easily pay-off those loans within time but did not have the suitable asset to be held up as collateral.

Thus, digital lending came to their rescue which eased out the job for them and made lending a task where they didn’t have to task their brain out. The SMEs have, and their creditworthiness is measured through big data, questionnaires which takes care of important aspects and measures the mental health of the borrower and also through their online presence on social media sites.

FinTechs have changed the dynamics of availing fast credit to be put to immediate use by the businesses by making it an easy proposition to follow.

How has financial lending changed the borrowing scene in India?

Banks and Financial Institutions are using artificial intelligence and automation to concur this tedious and time-taking process and to establish a digital lending platform which will be an easy, convenient option for anyone to opt for which comes with an effortless documentation process and a faster disbursal process.

These FinTechs have brought around a revolution which in the process has given rise to other financial institutions such as the NBFCs which have acquired a much larger market share in the lending market by providing loans at a much lower interest rate than the traditional institutions. You are also getting a lot more credit options for the SMEs which they can go for at attractive interest of rates which are convenient and don’t have any stringent time bound policies on them.

Most likely SMEs and other small business owner are going to benefit from this profitable integration of the two entities, and with FinTechs providing easy credit options, they are certainly going to get a boost in their operation and thus resulting in a fast-growing economy.

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