Backed by the extraordinary growth of India Stack and platforms such as Unified Payment Interface (UPI), India is well-positioned to enable more small businesses to access formal financial services.
Today, Indian start-ups are grappling with inflationary pressures and diminishing profit margins. That said, micro, small, and medium enterprises (MSMEs) struggle from lack of access to affordable financing. A recent Redseer-GetVantage report showed that digital SMEs alone would require $570 billion credit in the next few years.
The chief reason why start-ups and small businesses fail to find adequate and affordable financing is the thin-file nature of these businesses. In traditional lending there is considerable friction arising from the inability to evaluate or take on the risk of new-age businesses that are tech-first, young, lack collateral, and possess financial data of varying quantity and quality.
Additionally, traditional financial institutions seem unable to qualify new-age businesses that are in search of modern forms of capital that are dynamic and more flexible. The good news is that early-stage businesses now have access to alternative financing, including non-banking financial companies (NBFCs) and fintechs.
Flexible financing
Financing products and approval rates look very different today from a decade ago. Alternative financing, cash flow-based financing, revenue-based financing, invoice financing, recurring-revenue financing, and other modern solutions offer start-ups unprecedented access, flexibility, transparency, and speed.
Leveraging technologies such as artificial intelligence (AI) and machine learning (ML), alternative financing mirrors the dynamic nature of its emerging user base — namely asset-light and digital-first.
Moreover, alternative financing platforms exhibit a risk appetite akin to that of start-ups, in contrast to the largely conservative stance of traditional financial institutions. They champion intuitive and data-driven decision-making, paperless onboarding, and digital collections to enhance market penetration. Furthermore, data science and AI capabilities enhance debt recovery initiatives, fortify fraud detection mechanisms, and strengthen risk management protocols.
Online credit market
Digital lending marketplaces streamline the application process, doing away with the lengthy paperwork, stringent eligibility criteria, and slow approval times associated with traditional funding avenues. Along with adherence to evolving regulatory requirements, transparency is a hallmark of marketplace lending, as all stakeholders have access to information about interest rates, fees, and terms, enabling informed decision-making.
Initiatives like the Open Credit Enablement Network (OCEN) further aid in streamlining lending and borrowing processes. Fintech firms can facilitate integration with OCEN to provide customised credit options for start-ups. OCEN coupled with the Account Aggregator (AA) framework is poised to foster a seamless and interoperable network for alternative financing lenders.
By automating processes and operating with lower overhead costs, marketplace platforms can offer competitive interest rates and fees, making capital more affordable for early-stage start-ups.
Fintech lenders in India have shifted towards a personalised approach to underwriting. They incorporate segment-specific policies that leverage alternative data sources to take advantage of the unique market opportunities across diverse sectors — from e-commerce to cleantech and electric vehicles. In the coming years, the demand for working capital is projected to rise steadily, at a CAGR of about 20 per cent, especially given the expected doubling of digitised SMEs within five years. The integration of data-driven digital lending into online marketplaces, along with need-based financing through digital credit mechanisms like OCEN, is expected to further democratise lending, steering India closer to achieving the ambitious target of a $5-trillion economy by 2027.
(The writer is co-founder and CEO of Getvantage)