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Focus on building trust through technology – lenders & customers will follow!


By Meghna, CEO,
Crediwatch

MSMEs in India have come a long way over the last few years and are now contributing close to 40% to the country’s GDP. With about 56 million MSME entrepreneurs, the sector paints a vibrant landscape showcasing the abilities of Indian entrepreneurs to innovate and build products that address the unique needs of India. The ‘growth engine of India’ is amidst a rising wave of digital transformation and it is time to highlight how MSME entrepreneurs can stay ahead of the curve by leveraging the latest technology trends.

A growing digital ecosystem for small businesses

For an MSME today, ‘digital transformation’ is no more a distant dream that only large corporations could think of. There are plenty of SaaS products (Software-as-a-service) catering to various aspects of managing a business. These range from ERP, Infrastructure, Payments and Accounting to Partner evaluation, Online marketplaces etc. Not only are these available at an affordable price with no significant upfront costs, the products have evolved as user-friendly and customized to the needs of small entrepreneurs. As NLP (natural language processing) expands its reach, we also see multi-lingual support entering several of these products. Also, with the revolution brought in by government initiatives such as UPI and other emerging payment platforms, it is now easier for MSMEs to go digital.

Digital access to funds

What is even more interesting in the last 2-3 years is how Digitization is determined to solve one of the more crucial challenges MSMEs are grappling with – access to cheap credit. Earlier this year in January, the Reserve Bank of India (RBI) allowed lenders to adopt V-CIP (Video-Customer Identification Process) to perform KYC and onboard new borrowers. A similar guideline was released by the Securities Exchange Board of India (SEBI) in April for performing KYC for investment products (mutual funds etc). This is a major stride in this direction of digitization customer onboarding experience and many lending firms (public, private banks and NBFCs) are rapidly transitioning to digitize their onboarding flows. While customer delight is at the heart of this process, the core effort is to reach to ‘new-to-credit’ and the ‘unbanked’ community faster and efficiently.

Build good behaviour to become credit-worthy

We see a growing trend in the industry to access new and alternate datasets related to businesses, in order to assess their credit-worthiness. This is primarily driven by the fact that a global pandemic such as COVID-19 has turned out to be a black swan event for most credit assessment models and there is a growing need to either re-calibrate them or reinvent the process. Also, there is very limited data available from traditional sources for thin file borrowers and lenders are looking for efficient ways to gather and analyze new alternate datasets. Some of these datasets include GST returns, EPFO filings and legal cases related to borrowers and their owners.

While lenders use these new data points to assess credit worthiness, it is crucial for MSMEs today to ‘build good behavior’. Good behavior not only comes from paying your EMIs on time – it stems from the firm’s intentions to make regulatory payments and filings on time, speedy responses to legal cases against them and more importantly, showcase one’s ability to carry out business transactions prudently. Such actions help at bridging the trust gap by furnishing important and relevant information on a real-time basis. Gone are the days where such audits were conducted by the lenders on a periodic basis – with digitization at every touch-point in the lending process, today a lender is empowered to monitor the performance of a borrower even on a daily basis, if needed..

How MSMEs should leverage technology & become competitive

  • Timely Online filing of GST, EPFO and other regulatory filings: Your GST Filings, EPFO payments and MCA filings are available for tracking in the public domain. Lenders are evaluating your ‘good behavior’ by tracking these on a monthly basis – this is increasingly forming an input into your Credit Risk Assessment.
  • Build a Digital Profile and Network: In our conversations with several MSMEs, we have learnt that during COVID-19, they were implementing online platforms to either on-board new dealers and vendors or market their products to new customers. Such tools will go a long way in helping your business become part of a wider digital network.
  • Adopt digital platforms to automate & enhance processes: Be it accounting software packages or micro-ERP services, adopting mobile based and digital platforms are very easy and cost-effective today. There is an increasing demand to also perform Digital KYC on your business partners (suppliers, vendors etc) at the time of registration, to check their authenticity. We recommend adopting platforms for KYC and Early Warning Systems for leveraging the latest tools for due-diligence.
  • Enhance your Trust Score: While there is sufficient credibility at Large Corporates for doing business with bankers and suppliers, a Trust Score is more relevant for MSMEs who wish to provide a quick insight into their business to any lender or partner. With data, insight and good behavior, MSMEs can improve their Trust Score, which is used to evaluate their creditworthiness at lenders (similar to making EMI payments on time to improve your Credit Score with CIBIL).
  • Be Future-ready: Keep pace with contemporary industry statistics and dynamic markets to acquire your strategic advantage in the market – a quick adoption of new technologies for delivering high quality products and building a credit-worthy profile will help in the long run.

As the global economy fights its worst pandemic in the last few decades, international trade has come to a standstill and it is expected to take several quarters for countries to return back to pre-COVID trade levels. This is expected to impact Indian MSMEs adversely since several industries import raw materials from abroad – in fact, there is an expectation that input costs for MSMEs may rise by 10-40% depending on the type of industry, if Chinese imports get impacted alone.

Amidst this uncertainty, it is time MSMEs in India leverage the power of data, insights, and technology to manage and scale their business. To improve access to formal credit, it is important to stay technologically relevant and build superior brand credibility.





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