In the past few years, digital lenders that use innovative approaches and different sources of data to assess the creditworthiness of borrowers have begun lending to the Micro, Small, and Medium enterprises (MSME). Lack of access to finance has been cited time and again as a major bottleneck in the growth of MSMEs, with the most commonly cited challenges being (i) lack of formal data for credit assessment, (ii) lack of bespoke products that suit lender appetite and the risk profiles of borrowers, (iii) long turn-around-time for receiving loans, (iv) requirement of collaterals by traditional lenders, (v) high interest rates, and (vi) complex application procedures etc.
Digital lenders appear to have several relative advantages over traditional banks in addressing these barriers. They make use of differentiated credit underwriting models based on alternative sources of data to assess creditworthiness, extend risk-based pricing, and offer solutions designed to suit a particular target segment. Despite these perceived advantages there are limited studies assessing the basic characteristics of digital lending markets such as the different designs of loan instruments, the business models of different providers, the channels through which providers operate, etc. A nuanced understanding of the sector is essential to assess the wider questions relevant to policymaking such as the reach of digital lenders in serving new-to-credit customers, distant geographies, the challenges that they face in serving these underserved segments and so on.
This research brief attempts to bridge this gap in the literature by systematically examining the current state of digital lending serving the MSME sector in India. In this context, we interviewed leading digital lenders in the country and undertook extensive secondary research to analyse:
Typology of digital lendersserving the MSME sector in India to provide an understanding of the basic architecture of the firms operating in this space.
Types of digital loans and their featuresto provide insights into the value that digital lenders offer to the MSME segment through its various product design.
End-to-end digital lending processto grasp the extent of digitisation that is present in the digital lending process.
Cost of providing creditthrough digital lending to identify the areas in which digital lenders have a cost advantage.
Through the insights presented in the study, the research brief hopes to enable a deeper discussion on what role digital lending can play in improving suitable access to credit to small businesses in the country.
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[i] The author works with Dvara Research, Mumbai, India and can be reached at [email protected]. The author thanks Ms. Malavika Raghavan for her continued intellectual engagement and support. The study has also benefitted from discussions with Mr. Indradeep Ghosh, Ms. Malavika Raghavan and Ms. Beni Chugh. All errors and omissions remain those of the author.