Funding has always been a constraint to the growth of SMEs. Smaller entities often do not have the credentials to avail funding from banks or other formal lenders. Even where credit is available, they often have to go through cumbersome processes and pay exorbitant fees – impacting their competitiveness and growth prospects. It is not unusual for a bank to take a few months to approve an SME loan. In the western world, the median difference between credit rates to large and small borrowers is almost 2%. In Spain, an SME may end up paying a bank 10% for a loan – at a time when the bank’s own cost of funds is close to zero.
The situation has worsened post 2008. Despite the overall improvement in global liquidity, SMEs continue to struggle. In the US, small business credit from banks decreased 20% between 2008 and 2012. In India, barely 10% of small organisations have access to formal credit. Post-demonetisation, many SMEs have had their strength tested. Building a formal credit history takes time; many of these enterprises may not last that long.
All of this, of course, presents a large opportunity. Even 5% of the unmet SME lending requirements in India could be a $ 15 Bn opportunity by 2020. The system has the liquidity – but banks do not have the processes or risk management framework to enable lending to these firms. This is where alternate lenders come in.