By: Ramesh Kanitkar
November 2016 saw a huge shift in the digital finance space after the government announced that Rs 500 and Rs 1,000 notes would lose legal validity. Since then, digital wallets and Unified Payment Interface (UPI) have changed the face of payments in India. While retail applications of digital finance have revolutionized the sector there’s the less publicized side-digital lending to businesses, specifically MSMEs (Small & Medium Enterprises). Although banks and financial institutions adopted some aspects of digital lending, it was fintech start-ups that paved the way for growth in the industry. These start-ups not only digitized much of the lending process but also began the practice of contactless lending. Contactless lending is pretty much what it says it is: there is no contact between the borrower and the lender.
All verifications and checks are done digitally before the loan is disbursed. Traditionally, banking systems demanded the need for the borrower to be physically present at almost every stage of the loan process, from application to disbursal. This was not the best use of time for an entrepreneur or the CEO of an MSME. Fintech start-ups offered a way out. Not only did they offer collateral-free credit to MSMEs, but borrowers did not have to be physically present when applying for a loan. All paperwork became digital and loans were disbursed faster and more smoothly. As a result, borrowers saved time and effort, and lenders could check the feasibility of the business online.
Till early 2017, contactless lending was restricted to fintech companies and a few multinational lending institutions. Indian banks, particularly public sector banks, were hampered by size and regulatory constraints and so did not adopt all aspects of digital lending immediately.
For most MSMEs, a loan from a public sector bank was crucial because these banks offered lower interest rates, and did not usually demand collateral for loans under Rs 1 crore or so. On the other hand, private banks and non-banking financial companies (NBFCs) charged interest rates of up to 7 per cent more than public banks. They also insisted on collateral for loans that were usually very small, generally between 10-50 lakhs. Industry sources showed that public sector banks accounted for 50 per cent of MSME loans of under Rs. 25 crores. But getting such loans was no walk in the park. Borrowers had to first provide reams of paperwork and then track their application personally, often through several levels. It sometimes took a month for the loan to be sanctioned, and almost the same amount of time for it to be disbursed. To ease credit access to MSMEs, the government introduced a slew of digital initiatives. One such initiative is the launch of a portal that could provide public sector banks loans to MSMEs within an hour and disburse them within 8 days. Reports noted that by February 2019, banks had disbursed loans worth Rs. 30,000 crores through the portal.
The benefits of contactless lending to the MSME sector were many. For one, the new system did away with the borrower having to follow-up on the loan disbursal, which could take a month. Two, it gave companies easier access to smaller loans. Three, all relevant documents were uploaded online, which ensured total transparency. It remains to be seen if the contactless approach to lending can work in the long run with a larger number of applicants. So far, the system seems robust enough, and the government will invest in keeping it strong. The only possible drawback is the relatively long time taken to disburse loans. Even after it is sanctioned, the borrower may have to visit the bank branch before the loan is eventually disbursed. So, it is not an entirely contactless process. That said, this is a good beginning and will undoubtedly benefit MSMEs, and, ultimately, the economy. (INAV)