The Indian Economic Growth Cheat Sheet

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At the 26th meeting of the Financial Stability and Development Board, chaired by Minister of Finance and Union Affairs, Smt. Nirmala Sitaraman, a number of issues relating to early warning indicators for the Indian economy were discussed. Among other things, the discussion revolved around our preparation to deal with economic downturns. The history of several developed countries shows that this is a crucial element in strengthening the Indian economy. In this regard, the Indian economy is heavily under-leveraged.

According to an ACCA report1 of the 6.34 million MSMEs in India, 80% do not have access to traditional lending channels. A sector so crucial to India’s economic growth still borrows by drastic methods. This left the industry vulnerable to crisis and still plagued by slow growth.

Widening the credit gap – understanding the pain points of borrowers and lenders

Very often, small businesses are in dire need of loans and they need help getting them. This is mainly due to inefficient lending infrastructure, complex legalese in paperwork, and seemingly opaque lending policies. A lack of credit history (especially for New to Credit or NCT borrowers), unorganized books of account, and a reliance on intangible assets (which cannot be secured) as part of their business models pose significant hurdles in their conversations with lenders. Additionally, lack of knowledge on how to negotiate the most optimal terms with lenders, whether in terms of highest loan value, lowest price, or best term, can lead to delays in lending. obtaining funds, which can actually jeopardize growth. Worse, it could cause business owners to accept unsuitable debt products at sub-optimal/high-cost interest rates.

On the other hand, lenders also face significant data access challenges, discovering the best quality borrowers (defined by their fit with their risk appetite and return expectations) at a time when they need to go into debt. They want to achieve the best risk-adjusted returns and lower operating expenses and credit costs while scaling non-linearly. However, manual door-to-door origination and person-dependent underwriting process increase the turnaround time (TAT) for loan disbursement while not ensuring consistency in loan decisions due to bias or of human errors. Moreover, the disorganized keeping of financial accounts creates an impression of opacity around the cash flows of the borrower’s business, inciting mistrust. There is also a general reluctance to adopt the technology among lenders, especially with traditional institutions accustomed to certain established practices. This is mainly explained by the fact that driving this adoption at the local level is a laborious and time-consuming exercise with no certainty of lasting success.

To meet this need, the Government of India has announced several financing schemes for SMEs/MSMEs, such as Emergency Line of Credit Guarantee Scheme (ECLGS), Credit Guarantee Fund Scheme for Micro and small businesses (CGTMSE) and MUDRA Yojna, among others. However, the main obstacle to accelerating the diffusion of credit to SMEs is the fact that there are few digitization of central systemsallowing SMEs to get the most out of their assets.

Easing the Credit Burden – Property Loan

A property loan allows borrowers to raise a line of credit not only for their personal needs, but also for businesses to raise capital (known as PME-LAP or Secured SME Lending). SME-LAP helps small businesses leverage their assets and is affordable due to its lower interest rates compared to other debt instruments. Additionally, it also puts them in a position of strength, as it lessens the challenge of potential lenders looking at their business metrics through a conservative lens.

1. ACCA Report_MSME: India’s Agent of Economic Growth and Development

While this is a great solution to the credit problem for SMEs, there is one key challenge that needs to be highlighted. Unlike other fintech segments in India, LAP has not jumped on the “digital loan” bandwagon and has remained mostly offline to this day. This inadvertently means a host of delays and issues that are usually associated with such an offline process. To put this into perspective, as of June 2021, the total outstanding amount of LAP by public sector banks, private banks, NBFCs and other Fintechs stood at ₹6.4 Lakh Crores2with growth expected to accelerate by 2023. This segment includes approximately 5.7 million businesses.

How LAP Digitization Will Solve the Liquidity Gap

The key to supporting SMEs in their next stage of recovery and continued growth is clearing their pathways to loans, and the answer lies in Marketplace model, supported by technology. By digitizing the LAP, marketplaces offer SMEs quick access to competitive interest rates and accelerated disbursements through seamless digital processing, allowing them to focus more on growing their businesses.

Understand the Marketplace model

The marketplace model serves as a one-stop-shop for borrowers and lenders, in which they get the major benefits of higher discovery rate, opportunity to network, increased chances of approval, and optimal interest rates.

For borrowers, this means they have the ability to access a vast network of investors who otherwise would have been out of reach due to physical constraints or lack of awareness or lack of time and resources to conduct proper market research at the best prices. For investors, automating key processes means reduced operating costs and increased speed of disbursements, which positively impacts their top line and bottom line. The fact that, in a marketplace, borrowers and lenders are subject to numerous checks during the integration phase itself, offers both parties a high level of credibility.

The model is built on a robust platform powered by AI and ML, where the processes are largely automated. This helps mitigate the challenges presented by asymmetric data, analyze it without human error, and exponentially speed up the process. For example, AI-accelerated modules assess borrower creditworthiness with information devoid of common supervisory errors that human processes are prone to. The investor can share principled approvals based on their preferences and requirements, creating a transparent environment. Simply put, automating and streamlining the entire loan origination and underwriting process can provide end customers with an unparalleled experience, which translates into better loyalty.

To solve the liquidity crunch faced by India’s large SME sector, multiple factors need to work cohesively, and any siled mechanism will not be of much help in achieving this goal. However, digitizing the LAP is an untapped opportunity waiting to be tapped. This can not only improve SMEs’ access to capital, but lead to a reduction in the overall credit gap in the country. Above all, it is an important step towards accelerating financial inclusion for all and implementing the government’s vision of a $5 trillion economy.



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The opinions expressed above are those of the author.



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