SME Financing - The Road Ahead

The SME sector is India’s biggest job creator after agriculture, besides driving the spirit of entrepreneurship and innovation. A third of India’s GDP comes from these smaller enterprises. One of the biggest challenges that the SMEs face is funding - even as traditional credit models are a bit of force fit.?At Tata Capital, we not only recognize the immense significance of SMEs, we are also optimistic about the SME finance business. More than a quarter of our loan book is currently deployed to SMEs. As we celebrate MSME Day this week, here are a few of my thoughts on this very vibrant, diverse and interesting sector.?

1. Innovation: As we have already established, the traditional credit models do not work for the SME sector, where lengthy paperwork, site visits and physical collateral play an important role. As financiers, we need to look at more innovative models that can adapt to their way of doing business. For instance, GST data and other forms of alternative data offer a different approach to risk assessment. Cash-flow based lending models, will suit companies with fluctuating or seasonal businesses. Data on specific sectors can be used to understand peculiarities of certain industries and use different standards to gauge their performance.

2. Technology: That brings us to the next most exciting development - adoption of technology, which is a close partner to financial innovation. The government has kick started the process by introducing the Government e-marketplace (GeM), Account Aggregator ecosystem, Digi Locker and India Stack. Future initiatives such as the Open Network for Digital Commerce, the Open Credit Enablement Network, will only speed up the inclusion of smaller merchants into the mainstream. As lenders, we are increasingly incorporating data science and analytics in our credit decisions as well.

3.Women entrepreneurs: Women-owned SMEs are growing and, to my mind, their importance is social as well as economic. By 2030, women-owned businesses may touch 30 million and create 160 million jobs and SME financiers will play an important role in this growth. Creating a wider mentoring circle for women-led SMEs and ensuring they get the credit they need despite the steeper odds, will be on us.

4.Awareness and support: The Indian government has launched industry awareness activities, training programmes and workshops to facilitate learning of relevant world practices. The government has also set up seed capital support for financial assistance for the incubation and growth of businesses. We, as last mile lenders, must help by bringing in borrower awareness programs, to enable the companies to select the right source of funding, which will go a long way in solving their main problem - financing.

Smaller companies are more vulnerable to economic downturns. As their partners in their entrepreneurial journey, it’s important for NBFCs to solve some of their bigger problems related to funding and contributing to the sector’s growth in India. I am keen to hear about new challenges that SMEs face from a financial perspective. Please share your views in the comments.