Many years ago, Gandhi talked about the importance of strengthening the Indian economy at the grassroots level to ensure a holistic industrial, agrarian, and financial growth. While the foresight and wisdom in this statement may not have been visible at the time, a look into the Tier 2 and Tier 3 cities of India – especially in a post-demonetization India – reveals how essential it is to focus on this strengthening.
Tier 2 and Tier 3 cities are where most Indian MSME’s (Micro, Small, and Medium Enterprises) are set up, ranging from local manufacturers and traders of garments, kirana items etc. to small-scale service providers like salons, eateries etc These 50 million+ MSMEs are thriving, dynamic members of the Indian economy today. And thus by all rights, they should receive institutional support in order to facilitate growth and increase capacities for output.
Unfortunately that’s not the case. Lending to MSMEs has not been a favorable space for large banking institutions due to their conventional credit appraisal techniques. For instance, Mr. Yelankha Chowdaiah, the owner of a silk-weaving factory in South India, needed a small loan to repay debts, pay his 5 skilled employees, and invest in working capital to keep going. Neither did he have a credit score, nor enough paper trail for a large bank to make a sound decision on his credit worthiness. He had the required knowledge and expertise of his business but due to the lack of funds, he was unable to establish himself as a full-fledged enterprise at a larger scale.
The positive news here for Yelankha and many others like him, is that where giants are failing to step up, grassroot-focused organizations are paving the path for unprecedented growth. In order to match the 10% steady growth rate of the MSME sector, NBFCs are providing financial access to this sector at an increased rate of 14.2%.
Solving the MSME Growth Challenge
At Aye we are on the path of simplifying the lending process to micro and small businesses. Here are a few things we are engaging in, in order to provide better assistance to MSMEs:
- Developing a Customized Lending Process
Before applying a prohibitive selection parameter to an MSME’s loan request, it’s important to understand the key dynamics of their cash flows, their business cycle, the effect of seasonality on their performance, profit and expense margins and more. We understand that every industry has a unique need, a unique challenge and industry specific parameters for credit assessment are imbibed by us. With Mr. Chowdaiah, we tried to understand his business obstacles, his pull towards the silk-weaving industry and what he hoped to accomplish with his business. This helped us provide him with the necessary capital and support required.
2. Combining Human Intelligence with Data and technology
Several MSME loan recipients through Aye – who would otherwise have been rejected by banking institutions – have graduated to a second-level loan for their business because we’ve brought human intelligence and technology together. We are developing comprehensive systems to optimize end-to-end TAT and allow MSMEs to access credit faster. Data analytics of behavioral and psychometric parameters, in addition to credit scoring of existing customers, is helping us enter into repeat loan cycles with our customers.
3. Staying Connected with our borrowers
Through our network of local branches, we are able to reach out to our borrowers and vice versa. The specialized staff at branches is able to establish customer relations and quicker decision making takes place. Networking at the branch level leads to enhanced customer experience and customer retention.
4. Timely Reporting and Flawless Communication
“If you’re in banking and lending” says statistician and scholar Nassim Taleb, “surprising outcomes are likely to be negative for you.” Words to live by.
We assign a loan officer – who really functions as a caseworker – to each of our borrowers, and the loan officer pays periodic visits after the loan has been approved and disbursed. The officer also conducts periodic checks to ensure the proper utilization of funds, see how the business is performing, how the assets are growing, and reports back on many of the performance variations unique to each borrower.
Through new-age lending practices, we are repeatedly reminded of the importance of maintaining a human contact in lending. We are continuously working towards bringing together technology and human intelligence in order to deepen our impact on building inclusive spaces, for MSMEs to grow at their desired pace.