“SME rating and information database, either on a national or pan-regional level, would increase the transparency of SME investments. Information could be collected by various government bodies and then analyzed by a third party company using standardized risk methodologies. If made available via a website, it would allow investors to quickly analyze and benchmark potential investment “-Daniela Peterhoff
The Small and Medium Enterprises (SME) sector has emerged as a highly vibrant and dynamic sector of the Indian economy over the last five decades. SMEs not only play crucial role in providing large employment opportunities at comparatively lower capital cost than large industries but also help in industrialization of rural & backward areas, thereby, creating financial inclusion, reducing regional imbalances, assuring more equitable distribution of national income and wealth.
70% of SMEs do not use formal lending facilities, while another 15% are under-financed from such sources. The International Finance Corporation (IFC) estimates the formal SME credit gap to be $1.5 trillion globally – two thirds in emerging markets and developing countries. There is over a $200 billion debt financing gap in the SME sector in India where traditional banks do not offer loan facilities.
Restricted access to finance was cited by SMEs worldwide as their greatest constraint on growth. Acknowledging the importance of small businesses, governments, state agencies and international organizations have made many attempts to improve the situation. SME finance is rather a hard nut to crack. This poses challenges and risks like; operational cost to lend, difficulty in controlling and forecasting bad debt, lack of reliable data, credit scoring, business demographics, data on principals of the business.
NBFCs and alternative lenders are the latest innovators of making working capital available to SMEs. Unlike their traditional financial counterparts, they go through more than 1000 data points about any given applicant to determine credit worthiness, including social media, bureau records and vendor relationships.
There are emerging startups who are leveraging technology and alternate data sources to underwrite SMEs. Useful data includes government data, trade association data, financial data from competitors, and customer surveys. This scope of SME finance is ruled by reliable, verifiable data, otherwise called the technology disruptors.
“Combining data from business and proprietor sources adds considerably to the predictive power of the data for new/weak relationships, demonstrating how much data on a person running the business increase knowledge about the likely performance of the business itself.”-World Economic Forum and Global Agenda Council on SME lending using Technology
SME Finance is using technology to solve the problems that made this type of lending more expensive for the Banks. Algorithms with APIs are written specifically for in depth analytical skills and talent. The use of business intelligence tools to visualise and gain actionable insights, assure data security and regulatory compliance and be able to verify and store it for proper analysis. It has also helped diversify data used to determine SMEs creditworthiness and look beyond bank credit to non-bank debt (short and long term), and even non-financial data on borrowers.
As our digitalised economy becomes increasingly underpinned by information and data, the role of data analytics is only set to grow; it is imperative therefore that SME Lenders embrace these big data opportunities – or else face being left behind.