Digital financing: The way forward for financial inclusion in Asia – E27

The authors Aman Bhargava and Akshay Sharma are Senior Vice President and Manager at Capital Float, respectively. Capital Float specialises in digital lending to MSMEs in India.

In this age of digital disruption where technology has made an impact across a number of service sectors — e.g. transportation (Uber), accommodation (Airbnb), retail (Amazon) etc.– finance is clearly no exception. Post the financial crisis, incumbent large financial institutions have been weathering a storm of increased capital requirements (i.e. reduced ability to lend) and increased regulatory costs whilst dealing with an erosion of public confidence.

Digital lending, a subset of digital finance, has been growing rapidly in several large economies in tandem with lending platforms (e.g. Lending Club in the US, Funding Circle in the UK, and Lufax in China). As terms such as peer to peer (P2P) and marketplace lending have come to dominate headlines, digital lending has begun to revolutionise the traditional lending business through the use of technology in order to reduce costs, underwritten with surrogate data points, and speeded up processes.

Lending — ripe for disruption

Lending itself consists of three key areas:

  • (i) Origination (or customer acquisition)
  • (ii) Underwriting (or credit assessment)
  • (iii) Execution (including documentation, contract and flow of monies)

Conventional lending, especially in emerging economies, is an archaic process that is ripe for disruption in each of the above areas.

Traditionally, customer acquisition occurs via brokers or middlemen, underwriting is heavily collateral-based and execution is a tedious process requiring a lot of paperwork that usually stretches up to six weeks in duration. Furthermore, there is a fear of rejection, which in several cultures prevents a number of creditworthy borrowers from applying.

While the opportunity to disrupt traditional financial services is immense, it is important to understand the key drivers in this field. Like most sectors, it is imperative that governments put in place an ecosystem that can help and enable players to create these disruptions.

The three most important enablers for digital lending are:

1. Telecommunications and connectivity

The telecommunication sector has been pivotal in spurring the digital revolution globally. Creating networks that enable consumers to connect from computers, laptops and mobiles are the most basic requirements to kickstart a digital revolution.

From financial services to retailers, everybody depends on networks to provide a compelling online and mobile experience. Telecom operators must offer an integrated, multi-channel or omni-channel user experience: on the desktop, on mobile devices and in stores. The reach of such networks is essential for digital finance to succeed and penetrate new markets.

2. Technology and data

Technology, as one would expect, is at the heart of the digital revolution. Investments in technology by organisations have only been increasing over time.

Advances in digital technology have allowed services to reach a number of people, who had limited or no access earlier. If these advances have to continue, then increased capital investment in equipment and software is an absolute must. Encouraging companies to invest more in R&D, say, via tax incentives is crucial to penetrating the consumer base.

3. Regulations and policies

Post the financial crisis, increased regulations have forced large banks to reconsider their traditional methods, especially in light of additional balance sheet charges. This has opened up new markets globally.

Regulators in the West, particularly the UK followed by the US, have been proactive in allowing these markets to grow and challenge the traditional players. As the rest of the world cautiously opens up to this new space, digital finance players have thrived under flexible and friendly regulations.

It is imperative to encourage an atmosphere in which innovation in financial services and products offered to consumers is prevalent. While the need to be cautious post the 2008 crisis is justified, regulators should be careful not to stamp out truly innovative and disruptive ideas.

Digital finance — banking for the ‘unbanked’

A recent report by The Guardian, states that almost 500 million people across Southeast Asia still often turn to informal moneylenders to meet their everyday needs. Decisions requiring credit, such as expanding a business, buying a house or paying medical bills, are taken out of the hands of the so-called “unbanked”. Uninsured and with no savings, they are also less resilient to health problems, unemployment or a natural disaster.

Digital finance holds the key for financial inclusion, as nearly 50 per cent of the population in developing countries own mobile phones. The impact of digital lending in emerging economies goes beyond the traditional financial services offered. It also helps create additional jobs and acts as an economic stimulator.

A number of firms in Africa and Asia are using digital finance to tackle development challenges. Technological innovations, like mobile money, have acted as catalysts in providing a variety of financial services. Consumers at the bottom of the pyramid in several countries today are using mobile money to make payments for a wide range of services.

Apart from traditional services — such as credit, savings and financial education — consumers also enjoy access to money-transfer services, micro-loans and insurance.

How can we make this happen?

MSMEs (Micro Small and Medium Enterprises) also stand to gain substantially from digital lending. Apart from access to finances, electronic payment systems allow them to secure a diverse range of financial products and an opportunity to build a financial history. The importance of digital finance in building both credit history and transactional data of individuals and firms for lenders cannot be underestimated.

Close public-private cooperation is a key factor for this type of innovation to be taken to scale and enable people to live a more secured, empowered and included life. If approached wisely, it is possible for emerging economies to leapfrog developed nations in the adoption of these digital channels, and at the same time accelerate financial inclusion.

Article sourced from E27. Read the original article here.

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The SME Lending Puzzle: Why Banks Fall Short

Let us consider the following hypothetical scenario:

ABC & Co., a small services firm, began operations in mid-2011. It reported a 40% jump in annual turnover from Rs. 5 Cr in FY 2012 to Rs. 7 Cr in FY 2013. As a startup, the company has not yet broken even and reported losses for consecutive years. The promoter is well educated, previously worked in organizations of repute for over a decade before deciding to float this venture. The short-term finance requirement of ABC & Co is about Rs. 40 lac for 90 days, but does not have any physical collateral to offer as security. At this stage, the promoter of ABC & Co. decides to approach banks and NBFCs in the market to fund this debt gap.

What would this promoter’s experience be in today’s scenario? Would he be successful in securing the necessary funds?

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According to a recent statistic, 33% of companies operating in the Micro, Small and Medium Enterprises sector have access to banks and financial institutions, while the rest remain excluded and are compelled to raise money through informal channels.

This debt gap is alarming especially in the backdrop of the fact that SME segment contributes nearly 10 percent of the country’s gross domestic product and 45% of all industrial output.

Till date, banks and NBFCs have not been able to finance this debt gap effectively. What has prevented or restricted them from profitably penetrating this sector? Is it due to inherent credit risk in the segment, lack of collateral, government regulation and laws, or simply because there are greener pastures elsewhere to lend money?

Lets us understand the debt requirement of the SME segment (both early-stage as well as mature entities) before we try to further dissect this issue. In our example, ABC & Co. could require financing for primarily two reasons:

1) Capex, i.e. medium to long-term finance for business expansion, product diversification, renovation of business premises, or purchase of machinery.

2) Working Capital i.e. to cover short-term immediate cash flow needs arising from day-to-day business operations.

To cater to this demand, banks and financial institutions already have specific products (both fund and non-fund based) that can be broadly categorized into two categories for the sake of simplicity:

1) Simple lending products, which would typically cater to the first requirement of SMEs for Capex. These are medium to long-term financing products in the form of equipment and machinery loans, high yield unsecured business loans, Loan against Property etc.

2) Specialised lending products, which typically include factoring, trade finance, cash management services, project finance, bank guarantee, or letters of credit, which typically cater to the second requirement of working capital finance.

As is evident from the above, it is not the lack of “products” that explains the under-penetration of finance flowing to the SME sector. Rather, it is in the design, applicability and administration of these products to the SME sector that banks have fallen short.

In an effort to go deeper, we can identify four key reasons among others, for this shortfall:

1)  Sole Focus on Financials: The current approach to SME lending in most institutions is still heavily dependent on business financials- i.e. looking at historical data to predict future creditworthiness. Typically this involves a lot of paper work and many visits to the applicant.

This approach has not been very successful in the SME sector to-date due to the fact that the financials provided by the applicant are often opaque given the cash nature of business transactions and incentives to under report income to save on taxes. ABC & Co., on this parameter alone (aside from business vintage) would be filtered out as the current financial position reflecting business losses would not be very appealing to most financiers.

2)  Bureau Reporting: There are two kinds of credit bureau reports that can be generated by member banks and NBFCs – Individual and Corporate. While individual records are provided by most bureaus, only CIBIL currently provides reports for corporate entities in India. Valid records for SME entities are still not very evolved in the country. And while the bureaus can provide data on credit worthiness of the individuals involved in any given company, they cannot give relevant insights about an applicant who is a first time borrower.

Since ABC & Co. is newly established, there would not be any bureau record on the company. The application would then have to be judged on the strength of the individual records for the promoter as well as the business viability of ABC & Co.

3)  Selective Segmentation: The implication of the above two factors is that only the “upper layer” of the medium to large enterprise segment is able to pass through banks’ and NBFCs’ credit assessment parameters, leaving aside the major chunk of “small” entrepreneurs and entities whose need for adequate finance is more pronounced. These small entities could be major links in the supply chains of large players, and their inability to access finance could have the ripple effects across the value chain.

4)  Lack of Collateral Security: Lending in India traditionally has relied on taking adequate collateral as a “risk mitigant” to cover the credit risks associated with SME lending and the ambiguity around appraising this segment. The Loan to Value ratio (LTV) becomes the yardstick to segregate and approve or reject cases based on risk. This ratio is inversely proportional to the risk perception of the applicant.

Since ABC & Co. does not have any physical collateral such as property or machinery to offer and the promoter has pitched in whatever money he had in the form of initial capital into the business, his application would be rejected by most banks and NBFCs in the market today.

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This problem of access to finance for SMEs in India is even more accentuated for early-stage companies or startups such as ABC & Co. In their case, past financial performance would be not a correct indicator of the future potential of the enterprise. After initial round of equity funding from family and friends or seed investors, working capital requirements or ad-hoc needs for short term finance would inevitably kick in and must be dealt with in a timely manner to keep the firm operational.

To conclude, traditional lending to the SME sector in India can best be described as a “One Size Fits All Approach.” The risk management techniques used by banks and other financial institutions today are invariably more suitable for medium and large corporate entities. The same set of rules when inadvertently applied to small and early-stage enterprises result in a faulty output, i.e. the systemic rejection of most SME loan applications like ABC & Co. Given the intense nature of competition in the lending industry today, the consequence is that too many banks and financial institutions end up chasing the same set of “good” customers, leaving aside a much larger untapped segment of SMEs in the process.

Watch this space for more articles on the subject as well as suggested ways to underwrite “small” and
“early-stage” entities in the SME sector.

(Image credit: http://blog.directcapital.com/misc/small-business-loan-video/) 

Oct 24, 2018

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Tips to Improve Your Chances of Getting a Business Loan

Lack of adequate funds is one of the main reasons why enterprising individuals with innovative business ideas often struggle in materialising their projects. Even after a venture takes off and begins to grow, it will need extra funds at some point in its growth journey to enhance its operations and pay its suppliers. A business loan in India has been typically procured from banks, but over the past decade, though the number of small and medium enterprises (SMEs) has risen sharply, most of the SMEs who had applied for business loans remain unfinanced at large.

The gap between this demand and supply for loans is gradually being closed by new age FinTech lenders. By providing quick loans without collateral, FinTech companies are helping entrepreneurs in harnessing the full potential of their business ideas. However, the competition in this field continues to be huge, and applications for business finance are still approved based on creditworthiness.

If you are grooming your entrepreneurial venture for more success and plan to apply for business loans online, here are some tips to improve your chances of approval:

1) Create a neat business plan – You must have chalked out a business plan before foraying into a field of your interest, but if there are no formal documents in its support, it is important to prepare them. A formal business plan must include the objective of the project, the way it plans to earn revenue, the development strategy and the marketing methodology. It should also have copies of financial statements and the data on cash flow projections.

If you do not have an official business plan, you may be asked to demonstrate a solid record of revenue generation with at least one year in business. To get the application for an unsecured loan approved, it is important to prove that you are capable of repaying the loan amount without default.

2) Include a documented plan on the intended use of the loan – When you need a loan for business, you must also be able to tell the lender about its exact purpose. Be it a bank or a FinTech company, the lending institution will determine the credibility of your application on the basis of the reason for which you need the loan. While all organisations have their own unique requirements, the most common grounds for loans are business expansion, raw material or inventory purchase, administrative expenses and capital investments. You can also borrow from a digital lender to refinance or pay off old debts.

3) Know what kind of loan will suit your needs – Even after you describe the purpose of your loan, you may be faced with multiple loan categories that you can apply for. It is good to know the details of each – in terms of interest, tenure, payback plans and documents necessary to procure them. Banks and digital lenders often categorise their loan products for the ease of disbursement and management. While some credit products help in quick invoice financing, others may be more beneficial to buy inventory. Consult the lender to borrow profitably.

4) Double-check your cash flow projections – When a business does not have a high credit rating or a strong history of generating revenue, it typically gets saddled with a high interest rate on unsecured loan. It is therefore important to assess your cash flow projections. You must have a good knowledge of your ability to pay back and ensure that you will soon have adequate funds to clear off your debt.

5) Be aware of the risks that lenders assess – Lending institutions in both public and private sector evaluate loan applicants on a scale of risk. If a business is considered a ‘risky borrower’, there is a high chance that its loan may not be approved. The traits that make a business look risky are as follows:

– Very small owner’s equity
– Poor credit history or defaults in payment of previous loans
– Poor revenue earnings
– Very short period in the industry
– Weak accounting system
– Questionable management

6) Leverage your personal creditworthiness – Usually a business is a different entity from its owners. Even a sole proprietorship is a separate legal entity for accounting purposes. However, when it comes to getting a business loan without collateral, even a clean personal credit history can help you in obtaining the amount you seek. The strategy is to make payments on any outstanding personal debt and credit card bills as much as you can afford. This will give your lender more faith in your business and assure them that you are not burdening yourself with unpaid debts. You can personally guarantee for your business loans by proving your ability to repay them.

7) Research extensively for lenders – If you were denied a loan for business by a bank or a traditional lending agency, do not consider it the end of your search for funds. A FinTech company offering unsecured business loans evaluates your creditworthiness using parameters different from those used by banks. If you can successfully prove your expertise in business, FinTech lenders will provide adequate financing for your immediate working capital needs. So, think beyond the conventional platforms and apply for finance online using those documents that demonstrate your ability to pay back in time. Digital lenders also grant short-term loans, the amount being disbursed in a few minutes post the approval of the loan application.

The online lending industry has shown that getting a business loan need not be a frustrating process for SMEs anymore. FinTech companies are willing to grant loans and the application process can be effortless. All you need to do is start preparing early (in lieu of the competition from other similar applicants) and collate the minimum essential documents in support of your application.

At Capital Float, the basic premise is that all applications for getting a business loan will be evaluated with speed, efficiency and favour. The products for business loan in India are custom-fit for SMEs and include Term Finance, Online Seller Finance, Pay Later Finance, Merchant Cash Finance, Supply Chain Finance and Taxi Finance.

Oct 24, 2018

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Quick Business Loans for SMEs and MSMEs

Many enterprises launch themselves with great hope and confidence. However, on an average, one in every four start-ups fails to make it past its first year due to a paucity of funds. Low profits, high overhead or unforeseen expenses, incorrect product pricing, and overstocking of inventories can lead to negative cash flow for any small or medium enterprise (SME).

When the paucity of funds has been created by dubious business strategies, the owners need to review their style of working and make required changes. Other than that, there are times when the enterprise is doing well in its industry and simply needs some additional funds to add more facilities for customers/employees, buy raw materials, develop new product features or expand the business to a new location.

A lack of adequate working capital for such steps towards growth or innovation does not imply that the business is unprofitable. It merely needs to ask for an SME loan from a formal lenders at this stage.

While there are multiple sources of any SME or MSME loan, the priority of borrowers who are keen to execute a profitable business plan or fund the expansion of their venture is to get a quick business loan for SMEs/MSMEs. They do not want to miss the opportunities at hand and search for lenders who can finance their plans in minimum time.

How to get the fastest business loan ?

In an age when digital technology is facilitating different transactions for both businesses and consumers, several non-banking finance companies have emerged as FinTech (acronym for financial technology) lenders who have condensed the loan-granting process. A FinTech company can be the source of fastest business loan for SMEs/MSMEs.

Applying for a Quick Business Loan and Its Benefits –

As a leading FinTech company offering fastest business loan for SMEs/MSMEs, Capital Float funds the growth of Pvt Ltd, Prop and LLP companies in various industries. We have an array of credit products for SME and MSME units that have robust strategies for continual progress in their domains.

To make a working capital loan accessible for more and more businesses, we at Capital Float have a simple eligibility criterion that only requires the borrowers to show a potential for growth in their industry. This efficacy can be proven with a minimum operational history of one year and a certain yearly revenue benchmark, which differs as per the nature of the business/profession, and can be checked on our website or by calling our team at 1860 419 0999.

The process of applying for our SME loan is fully digitalised, and it takes less than 10 minutes to fill in the necessary details. The relevant documents can also be uploaded online to support the information provided in the application. These generally include soft copies of papers validating business ownership, KYC documents, ITR/GST returns and recent bank statements.

Once it is submitted, we review the application on the same day, and upon approval, the requested amount is disbursed within 48-72 hours. The speedy disbursal of funds enables the borrowers to implement their business upgrade/improvement/expansion plans and advance on their profitable journey. The returns from such steps for business growth also make the repayment process stress-free.

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If you have a business plan that will take your ambitious venture to its next stage of growth, Capital Float has a quick Business loan for SMEs/MSMEs that you can use to finance it. For more information on our loans or to meet us personally, do write to us on info@capitalfloat.com

Oct 24, 2018