Building Trust in SME Lending: The Importance of Data Privacy and Security

20 Sep 2023

The Small and Medium Enterprises [SME] sector is poised to be the key to unlocking India’s economic development, and rightfully so.

growth in MSMEs contributing growth in India productivity and employment.

The Ministry of MSME’s annual report for 2020-21 said that India has approximately 6.33 crore MSMEs that contribute significantly to the country’s productivity and employment. The employment of the roots is what this sector is often referred to.  However, despite its significance and reach, the struggle to acquire credit has hampered the sector’s growth.

report of IFC tells that 85% of  MSMEs remain underserved in terms of credit

A report by the IFC stated that 85% of MSMEs remain underserved in terms of credit, and only one-fifth of these financing gaps were fulfilled by formal credit.

Why does this gap exist? The name is pretty straightforward. The sector is so vast that, more often than not, it doesn’t fit into the blueprint of what a traditional organisation would want to extend credit. 

The lack of adequate collateral and limited financial documentation place this sector in the middle of the high-risk category. This, coupled with uncertain cash flows, higher failure rates, and sector-specific risks, makes it challenging for the sector to access credit.

This brings us to the ever-pertinent question of, 

The Need to Revamp the Traditional Lending Methods 

Banks in India operate within a regulatory framework that includes requirements related to capital adequacy, risk management, and lending practices. These regulations can impose limitations on traditional banks, making extending credit to SMEs difficult. This is where Fintech organisations play a crucial role in enabling access to credit for SME lending. 

Let us see precisely how.

The Fintech Connect

how fintech leveraging technology for better lending facility and complete operation

Leveraging technology and innovation, here are several ways in which fintech organisations facilitate credit access for SMEs:

Alternative Credit Scoring

With SME often poised as the sector of grassroots, catering to the needs of all there is need to device a methodology that speaks for the grassroots.

If the original doesn’t stick, you find new ways.

Based on advanced data analytics and machine learning algorithms, fintech organisations can develop alternative credit scoring models considering broader data points beyond traditional credit history. We have digital transaction data, online activity, social media behaviour, and cash flow patterns., to name a few. By using these alternative credit scoring methods, fintech organisations can assess the creditworthiness of SMEs more accurately, even if they lack a strong credit history.

Digital Onboarding and Application Processes

The world is going online. So should the application system. Streamline the entire loan application process, where access to the credit is on the tip of your fingers.

Digital onboarding processes enable faster and more convenient access to credit, reducing the time and effort required to secure loans.

Online Marketplaces and Peer-to-Peer Lending

The power of community. 

Fintech platforms often operate as online marketplaces, connecting SME borrowers directly with lenders or investors. Peer-to-peer (P2P) lending platforms allow individual lenders or institutional investors to provide loans to SMEs, bypassing traditional banks. 

The answer was always in the SME ecosystem.

These platforms facilitate faster loan approvals, competitive interest rates, and increased transparency, benefitting borrowers and lenders.

The above three pointers pave the way for the much-needed customised financing option for the sector, which has been traditionally missing from the ecosystem. Today’s fintech organisations understand SMEs’ unique needs and tailor financing options accordingly. They offer flexible loan terms, including shorter repayment periods, smaller loan amounts, and customised interest rates based on the specific requirements and cash flow patterns of SME borrowers. 

They cater to a sector, demography, and diverse financial needs, fostering growth and development.

So, where is the catch?

roadblocks - Compliance and Risk Management,

Compliance and Risk Management

With alternative access to credit and capital in place, the security concern automatically crops up. 

Each of the above laterals requires a wealth of sensitive information, including financial statements, transaction records, and personal data. Safeguarding this information is crucial to building trust between lenders and borrowers. 

This is where banking APIs have emerged as a game-changer, offering a secure and compliant framework for data sharing between financial institutions and third-party service providers. 

banking APIs is their ability to address compliance concerns,

And here is how, 

Enhanced Compliance Measures

One of the significant advantages of banking APIs is their ability to address compliance concerns. Deploying an API via a Fintech provider essentially allows the users to piggyback on the editing compliance in place. With Know Your Customer (KYC), Anti-Money Laundering (AML), and General Data Protection Regulation (GDPR) being pre-requisites of most fintech offerings, there is a guided effort to protect customer data, prevent financial crimes, and promote fair lending practices. 

Building Trust with Borrowers

By leveraging banking APIs, SME lenders can establish higher trust with their borrowers. The streamlined and automated lending processes enabled by APIs offer several advantages, including faster loan approvals, reduced paperwork, and improved customer experience. SMEs benefit from the convenience and efficiency of these processes, leading to increased satisfaction and trust in the lending institution.

As data privacy continues to increase in importance for organisations worldwide and those they serve, privacy spending has taken a front seat, essentially for the SME sector. The global study said that the most significant growth from 2021 to 2022 was up 17 percent to $2 million from $1.7 million. Quite rightly so, as the automation, efficiency, and enhanced compliance measures enabled by APIs instill confidence in SME borrowers, fostering trust and enabling seamless access to the financing they need to grow their businesses. 

Oxyzo is a notable Non-Banking Financial Company (NBFC) at the forefront of facilitating digital lending solutions for Small and Medium Enterprises (SMEs). Oxyzo provides collateral-free working capital finance in the form of purchase finance, invoice discounting, and other products, tailored to the specific needs of SMEs. Oxyzo’s prowess in marrying technological innovation with stringent security measures underscores its dedication to providing SMEs with a secure, efficient, and reliable lending environment within its advanced information system.

On Decentro’s part, whether it is enabling an entire lending lifecycle or just the credit part of a business use case – with compliance and efficiency being the ultimate promise, the vision remains to empower fintech players via simplified banking APIs.