My Co-Founder and I started ZipLoan (Digital lender for micro businesses in India) around 3 years back. Over the last three years, ZipLoan has emerged as one of the key Digital MSME (Micro, Small and Medium Enterprises) lenders in India. However, given the gap in the current credit supply versus demand in this segment, the journey has just begun for us.
Digital MSME lending in India is a very vibrant space today receiving a lot of interest from the Government, Regulators, Global VC & PE funds, Banks, NBFCs, and the new FinTech firms. Demonetization (Nov 2016) and GST (Goods & Service Tax implemented in India from July 2017) have disrupted this space and created an ecosystem for Digital Lending to MSMEs stronger than ever before.
The Indian government recently launched a Support and Outreach Programme for MSMEs where the key highlight was “MSME Loan in 59 Minutes”. This scheme promises loans of up to Rs 1 Cr for MSMEs, to be approved by Public Sector Banks in only 59 minutes. While the government is taking such initiatives, a similar push towards removing roadblocks for private Digital MSME lenders in India could go a long way in rapidly democratizing credit for MSMEs. This would bring down credit cost for lenders and the MSMEs alike.
There are two long-standing challenges in data acquisition for Digital MSME lenders that have not received their due attention as these are legacy or design related issues. On the other hand, a recent Supreme Court ban of Aadhaar (similar to Social Security Number in the US) based authentication by private companies has been largely covered in media as it involved a tussle between the government and Supreme Court.
The two data acquisition challenges are around collecting Bank Statement and GST returns data from the MSMEs which are also the most important data sources for credit assessment other than the repayment track record available from the Credit Bureaus.
1. Issues in collecting Bank Statement Data
Digital MSME lenders use bank statements as a surrogate for the financial documents like Income Statement, Cash flow Statement, or Balance Sheet. Different players might be utilizing this data differently but most try to capture the detail of every transaction from the bank statement by converting it into a machine-readable format like JSON, XML, etc.
Though there are solutions available to convert Bank Statement in PDF formats (downloaded via a net-banking facility of Banks) to a machine-readable format and verify them for originality, there are still a large number of MSMEs in India who do not have a net-banking facility.
In the latter case to submit Bank statement data to the lender, the MSME applicant needs to
Collect the bank statement printout (typically for last one year) from his bank branch. This printout may or may not be in the standard A4 format making it difficult to be scanned.
Get the bank statement scanned (or clicked) where total no. of pages could range from average 30 to as high as 100 pages.
Email (or WhatsApp) all these images to the lender.
The lender now faces following issues consuming this data
The scan (or picture) quality would be often poor. Most of the technologies including OCR (technology to convert an image into text) are not advanced enough to handle low resolutions/folded pages/blurry photos. Thus, the lender is unable to use any technical solution to convert these scanned documents into a machine-readable format like JSON, XML, etc. with good accuracy.
The lenders often get this data manually entered in their systems which is unscalable, error-prone and involves significant time and cost overhead.
As the bank statement is scanned, the chances of fraud (tampering with transactions) are very high.
Some of the Digital MSME lenders only allow original PDF format for bank statements in their loan application process to avoid the above trouble but it means losing an opportunity to serve a lot of MSMEs especially ones having bank accounts with PSBs (Public Sector banks) where net-banking is yet not very popular.
United Kingdom came up with Open Banking (which forces UK banks to open up their data via a set of secure APIs) to address this. In the Indian context, I could think of a simpler solution (without any Aadhaar based consent or authentication layer) as below.
Possible Solution for easy sharing of Bank Statement Data between the applicant and the lender
All Banks should be mandated by regulators to offer an SMS service, where the account holder can request the bank statement on the email in a machine-readable formats like XML, JSON, etc. from his or her registered mobile number. Thus, someone who does not have net-banking facility can still provide the bank statement data in a digitized format to the lender.
2. Issues in collecting GST Data
By virtue of the way GST has been implemented in India, more and more MSMEs are registering them with the GST (roughly 9.2 million MSMEs in India are now GST registered). Also, GST is a very informative data source for Digital MSME lenders giving access to MSME’s total sales data with invoice level details, purchase data, no. of clients, product category, etc. Digital MSME lenders can register themselves as an ASP (Application Service Provider) with one of the GSPs (GST Suvidha Providers) and integrate GSTN (GST Network) APIs in their system.
However, before fetching GST data, the following steps need to be performed:
MSME applicant needs to log in to GST portal using their user id and password and enable API access in the GST Portal (which is disabled by default).
The Lender would then initiate a request with GSTN to send an OTP on the registered mobile no. of the MSME applicant.
Once this OTP is provided by the MSME applicant, the lender can establish a connection with GSTN and access GST Data.
This experience is not seamless either for the lender or for the applicant.
The key issues faced by the Digital MSME lenders in the above steps are:
The feature to enable API Access on GST portal is not easily visible. Given the low comfort level of many of the MSME applicants (especially micro businesses) with GSTN portal or Web in general, this step requires a lot of assistance from the lender.
Since there is only one registered mobile no., user id, and password for GSTN portal, a lot of the MSMEs let their CAs (Chartered Accountants) or Tax Consultants manage their GST account who use the portal readily for GST return filing. This means that the lender might need to coordinate with the MSME’s Chartered Accountants or Tax Consultants for performing the above steps required for consent.
Possible Solution for easy sharing of GST Data between the applicant and the lender
Enable API Access by default.
Give an option on GST Portal to create a secondary mobile no/user id and password for Chartered Accountants or Tax Consultants. It would help MSMEs to keep the primary mobile no. and credentials for their self-use or providing consent and let their Chartered Accountants use the secondary credentials.
Would like to hear from other Digital MSME lenders and stakeholders about their data acquisition challenges and possible solutions for the same. I am available at firstname.lastname@example.org