Raising funds has always been a problem for SMEs…
India has over 48 million SMEs (Small and Medium Enterprises) which employ about 40% of India’s workforce. It is obvious that SMEs play a significant role in the national economy. SMEs are made up of diverse segments such as small scale industries, retail shops, trading outfits etc.
Raising funds for working capital has not been easy for SMEs, particularly in tier 2 and tier 3 cities, in view of the preferential bias of Banks and lending institutions towards large, established companies. The traditional financial institutions consider lending to SMEs involve higher risks and therefore interest rates on business loans to the latter is usually higher and amount advanced often has been lower than requirement.
Many SMEs had stayed small and unorganised to avoid taxes and regulation which had made it difficult for Banks and NBFCs to understand and meet funding requirements of SMEs. Further, Banks are normally reluctant to do due diligence of such small businessmen.
Digital lending players are here to lend to SMEs…
To give a fillip to small and medium businesses, certain digital and app-based lending platforms have entered the scene with the sole objective of catering to the financial needs of the SME sector. They have been helped by the fact that many SMEs have created a digital footprint by entering the digital eco-system. For instance, you may be an app-based cab driver (Uber, Ola etc) needing an auto loan or a seller on e-commerce platforms (Flipkart, Amazon, Snapdeal etc) requiring a SME loan. In the absence credit score, To sanction loans, the digital and app-based credit providers look at payment history, transactional data, business volume, behaviour, social network etc. With a flexible approach and dependence on technology, quick decisions are made which result in faster loan disbursals.
Interest rates offered are also competitive. Loans as low as Rs 5000 and up to Rs 5 Lakhs are disbursed by most of these lenders at interest rates ranging from 16% to 18%. However, the loan cannot be approved online since RBI does not allow digital signatures. The loan application would have to be physically signed by the borrower and delivered to the office of the credit provider.
Mudra is a Government of India initiative to grant loans to non-corporate small businesses (proprietorships or partnership firms) such as small manufacturing units, service sector units, shopkeepers, fruit/vegetable vendors, truck operators, food-service units, repair shops etc. Loans would be towards working capital requirements, buying plant and machinery, renovating offices etc.