Access To Timely Credit At A Fair Rate Is Essential For MSMEs' Growth: PayNearby Founder

In an interaction with Urvi Shrivastav, Editorial Lead, BW CFO, BW Businessworld;  Anand Kumar Bajaj, Founder MD & CEO of PayNearby speaks about the struggles faced by micro, small, and medium enterprises today around the issues of availing loans, and how PayNearby is helping them overcome these issues.

What are the challenges MSMEs face while borrowing? What are the formal lending penetrations & interest rates compared to informal lending?

The MSME sector is an integral part of the country's economy. Despite being one of the key contributors to the country's GDP, it faces the fundamental issue of access to credit. For years now, the creditworthiness of borrowers has been measured based on their credit score. Due to this, a large part of the population, including MSMEs, has borne the brunt. As per a BizFund report, only 16 percent of MSMEs in India get formal credit 1, leaving the rest of them, credit-starved. Owing to this, a large number of these enterprises rely on informal credit sources growing the hazard of credit fraud.

Access to timely credit at a fair rate is essential for MSMEs' growth as well as success. Financial institutions have limited their exposure to this sector mainly due to the small ticket loan size, high cost of servicing the segment, lack of proper documentation in the segment and limited capacity to offer immovable collateral. Banks usually adopt strict eligibility and approval criteria to provide MSME loans because of this confidence crisis. Furthermore, a lack of credit history adds woes by making it a risky consideration by the credit providers.

Although, banks typically charge a lower rate of interest than informal lenders, the strict qualification criteria limit its distribution to a larger segment, who may not have enough credit history and other necessary documentation. The majority of MSMEs therefore have to take loans from alternate sources. Due to higher risks appetite and the absence of any regulatory supervision, typically the cost of borrowing from alternate sources range from 50-200% as against 30-45% from formal lending institutions.

How is PayNearby evaluating the retailers for loan approval?

A substantial percentage of retailers are deprived of credit as they either do not have a credit footprint or have a poor credit history. The biggest challenge faced by our retail partners is the lack of formal records of income and expenditure, business track record, nil or improper credit history, and a very high cost of last mile credit availability. To resolve this, PayNearby has employed AI and ML, to not only source loan applications digitally on our tech platform, but also to assist our Lending partners in comprehending the creditworthiness of applicants. PayNearby’s home-grown ‘Bharosa Score’ evaluates each retailer on a scale of 0-10, making them eligible for the lending services offered on our platform. This score is AI-based and assesses more than 100 parameters that provide insights into the behavior of each retail partner. This, in turn, has allowed us to not only process transactions faster but also offer the right loan amounts to the applicants. Each qualified retailer, based on the score, gets an opportunity to apply for loans with our Lending Partners.

PayNearby is fortifying MSMEs at the last mile with their credit needs. With the intention of providing access to credit to our micro-entrepreneurs, we at PayNearby, started our digital lending vertical. Our innovative and robust technology-backed Distribution-as-a-Service (DaaS) platform of 50+ lakh outlets reaches out to the deep roots of the country, and creates simple and efficient micro-lending experiences for our retailers, enabling them to secure loans at the click of a button. Currently serving 90% of India, we are committed to assist the retailers with financial backing to ensure their businesses function smoothly thus, bringing them into the mainstream credit fold.

How are retailers paying back their loans?

For smooth repayment of loans, every retailer that has obtained the loan executes a NACH to automate monthly EMI payments via their bank accounts.

What are the challenges you face while lending to MSMEs and how did PayNearby overcome them?

The biggest challenge we are still working on is financial literacy. Due to a lack of financial awareness, adequate education, and language barriers, the MSMEs at the last mile take a longer handholding process. We are constantly attempting to make our product information as specific as possible. In addition, we have simplified our user interface to give seamless information about the product. Apart from that, we handhold them in terms of constantly educating them through snackable videos, bringing them up the financial literacy curve.

The collection efficiency for this segment ideally rests at about 85-90%. We are however pleased to state that for us the collection efficiency rate is much better than the industry benchmark.. We have a ML based collection prediction score model which gives us an indication of the percentage of successful collection before every collection cycle. With each passing month, the efficiency of this score is upwards of 95% and this helps us sharpen our collection strategy. Advanced collection management methodology leads to getting the payments on time, even for the borrowers who have missed paying their EMIs. Additionally, we work very closely with our banking partners to follow up on due collections through IMPS/UPI and various other repayment options. The distributors and our local retail sales team are available for assistance in case of communication issues with the retailers.

How are FinTechs enabling newer revenue streams for MSMEs?

The Digital India initiative has played a crucial role in the growth of fintechs in India. Fintechs of the new digital era has revolutionised how people transact or use financial services, especially the larger Bharat. The advanced technology has empowered MSMEs to offer evolved services and drive more value from their customers. An important area where fintech participation has led to a visible growth in the MSME sector is the opening up of newer revenue streams for these small and medium businesses on the innovative, tech-led platforms offered by fintechs. A local retailer, whether it is a kirana store or a pharmacy, can today augment his income by offering additional services like banking and digital products from the same store. This allows them to optimize their space and derive more value for money from the same customers. This also helps them not only to attract a newer segment of buyers, but also upgrade themselves and stay relevant in this digital age of virtual marketplaces and superstores.

From opening a savings account to instant remittances or cash withdrawal points, technology innovations offered by fintech organizations have helped MSMEs go beyond their organic business, and double up as the area’s banker, ensuring not only more business but more loyalty from existing customers. This digital empowerment also helps drive the bigger agenda of financial inclusion in the country.

Tech empowerment of MSME to help them compete with giant retailers. PayNearby partners with neighbourhood retail stores, mainly small kirana stores and mobile recharge stores, and enables them with the tools to provide assisted financial and digital commerce services to their local communities. Through its DaaS service, the company aims to empower local stores to evolve into retail powerhouses by blending easy-to-use digital technology with last mile connectivity. Today, there is a dire need to equip local retailers with the skills to perform digital transactions. With PayNearby's technology, we are entrusting these small and medium businesses to stay relevant and deflect the challenges of the evolving economy. Technology and collaboration have resulted in exponential, scalable growth for MSMEs, as well as in the elimination of high costs and the optimisation of operational processes.

What value is PayNearby adding to partners, retailers, and company with its lending vertical?

The objective of financial inclusion stays incomplete until our retailers and their customers find it easy to access credit. We have provided our retailers access to livelihood, insurance and savings with various products in the financial services spectrum. The only missing piece was access to credit. We are addressing the issue of working capital credit for our retailers through loans from our network. The solution has helped fortify and drive the business growth of PayNearby's retail partners.