Digital Data - An enabler for Digital SME Lending

The buzz around SME or MSME Lending has been around for quite some time. For the uninitiated, MSME is Micro, Small & Medium Enterprises. To give you a perspective, Government of India defines enterprises with revenue not exceeding Rs.5cr as micro, those between Rs.5cr to Rs75cr as small and Rs 75cr to 250cr as medium sized businesses. Major contributors to employment and economy, they are the backbone of the so called "informal" sector. It is this segment of business that suffered the most during the pandemic and barely managed to pull through.

World over, banks have a separate business unit called Business Banking or MSME Banking to service these customers. Ironically, for MSME, the access to formal sources of funding remains low and applications for finance face a high probability of rejection. The processing cost for applications remains the same irrespective of the ticket size and lending to SMEs does not earn much in terms of interest/commission. So, from cost/benefit point of view, it does not make sense. On the other hand, lack of credit/transaction footprint makes lending risky.

This, however, is changing. Especially in countries like India where there is focused effort from the government to create identity through Aadhar, a transaction/taxation history through GST and business & financing opportunities through marketplace infrastructure enabled through OCEN. 

OCEN stands for Open Credit Enablement Network. It is a network between SMEs, Loan Service Providers (LSPs), Account Aggregators & Lenders/Banks. 

Loan Service Provider (LSP) Apps are embedded into e-Marketplaces where SMEs transact. LSPs offer SMEs options to borrow from the list of Lenders that are onboard OCEN. SMEs in-turn consent to share their data with Lenders through Government approved Account Aggregators. And finally, Lenders fund the SME based on the data shared by Account Aggregators.

It makes sense for all parties to onboard this network. For SMEs, this network is an opportunity to get easy/streamlined access to funds. For LSPs and e-Marketplaces, it is an opportunity to improve transactions volumes as well as earn commission by distributing loans. For Account Aggregators, it is a revenue opportunity (probably data monetization opportunity in future??). For banks, it provides them access to digital data necessary to digitalize lending end to end - lowering both the cost and risk of SME lending on one hand while giving them access to a large under serviced customer segment. It is a win-win.

Compared to larger Corporates, SME onboarding/lending is less complex if the data is available. India has managed to enable creation of data through Bank Accounts/Aadhar/GST/UPI/PAN and using this data opened up a lending marketplace for SMEs.

Outside India, we see third party data providers like Codat that enable SMEs to share with the banks data from SME accounting/taxation systems. 

Digital onboarding/lending for SME is not far and policy/technology interventions by governments/industry bodies to bring parties together on one platform would speed up digitalization and in turn open doors to SMEs to access finance from banks.