Digital Empowerment by Banks for SMEs in India

Sabyasachi Rath, Chief Executive Officer and ED, Essel Finance Business Loans Ltd;
Vikas Dimri, Director, Business Head, Deutsche Bank;
Harshit H Jain, SVP/Global Head - Transaction Banking and Digitization Business, Nucleus Software; 
Shankar Subramaniam, MD and India Head (Global Transaction Services), Bank of America;
Sumit Gupta, Senior Group President, Yes Bank; 
Manish Kothari, Sr. EVP & Business Head (Corporate Banking), Kotak Mahindra Bank;
Sachit Sahni, Head Product Management, IndusInd Bank;
Rajesh Lahori, Head Cash Management, RBL

The Small and Medium Enterprise (SME) segment in India has been a leading driver of growth, as it contributes a third of the country’s GDP. Yet it faces a major bottleneck in terms of inadequate funding from the formal financial sector. What is keeping banks from lending more to SMEs? How can digitisation help improve the flow of funds to this sector? Can digitisation also contribute towards making supply chain management more robust?

To explore these and other related issues, Forbes India hosted a panel discussion: the Forbes India Transformational Series powered by Nucleus Software.

Comprising luminaries from the world of banking, NBFCs and banking technology, the panel included Vikas Dimri, Director, Business Head, Deutsche Bank; Harshit H Jain, SVP/Global Head - Transaction Banking and Digitization Business, Nucleus Software; Sumit Gupta, Senior Group President, Yes Bank; Manish Kothari, Sr. EVP & Business Head (Corporate Banking) Kotak Mahindra Bank; Sachit Sahni, Head Product Management, IndusInd Bank; Rajesh Lahori, Head - Cash Management, RBL Bank; Shankar Subramaniam, MD and India Head (Global Transaction Services) Bank of America and Sabyasachi Rath, Chief Executive Officer and ED, Essel Finance Business Loans Ltd.

Digitisation and supply chain management
The dialogue commenced with a quick recap of the massive business opportunity that the SME sector in India presents to the banks. Setting the backdrop, Harshit Jain explained, “I don't think that banks really understand SME businesses very well. I have seen that sometimes SME businesses fall within retail banking and sometimes, they are considered within corporate banking and some SME business is treated as general business banking.”

This led him to conclude that banks are often not very clear about how to deal with SME business. Another interesting insight he shared was that lenders often have to seek SME customers out, based on their risk profile and the return they could deliver to the bank. Using digitisation would enable banks to woo SMEs better and give them access to a piece of the large and growing SME financing pie.

He also pointed out that supply chain finance is an attractive proposition for banks as it could match the unutilized credit lines of the larger customers/eco system players at the bank. “In the supply chain finance world, digitisation has played a key role, as it has enabled banks to participate in the logistics funding story and at the same time leverage the financial supply chain.” Digitisation has also helped empower SMEs, automatically on-boarding them and bringing along their entire ecosystem of suppliers and customers.

Expressing his view, Manish Kothari said, “I don't think that banks base their decision not to fund SMEs on a belief that it is a very risky segment. It's a question of how they can make the business of lending to SMEs commercially viable and cost effective.” Moving on to evaluation of credibility by using data cost effectively, he observed, “Digitisation is helping in multiple ways. Lenders can pick up customers who leave a digital trail; at the same time, this data can then be collected and processed digitally. This can lead to a decision on credit worthiness.”

Hastening Digitisation
The discussion then moved on to how the entire decision making process could be hastened. Sachit Sahni opined, “Digitisation is not an event at a particular point of time; it's got to be a journey. You cannot get data scientists and analysts to make a decisioning model and not have any intelligence built into it. The intelligence is going to come over a period of time.”
Describing the developments around digitisation in credit, he continued, “There is a little bit of hype and hoopla around what fintechs can or cannot do. They offer models which have worked on a smaller scale and try to build in scale as they go along. Over the last three years that hype and hoopla has now gone down.”

Looking at SMEs from the perspective of a foreign bank, Vikas Dimri said, “The challenge for SMEs today is timely access to finance at a reasonable cost. Banks, on the other hand, may want to lend to SMEs but they face the challenge of access to reliable data on this category of businesses. Even the Credit Bureau may offer inadequate or incorrect information on their track records. However, more recently, the quality of data has improved significantly. What held true 10 years ago does not hold true anymore. Add to that the richness of data that has got created through public sector digital initiatives, like GST and Aadhaar, as well as digitised social networks and online market places, like Amazons; the amount of data now available is significant.”

On the issue of scalability, he suggested that the challenge at present is cost efficiency. “Cost efficiency will emerge with time. Right now most banks are replicating their institutional banking processes for the SME segment. This involves a lot of physical paper being processed, which does not become viable in the case of smaller loans as the net margins are lower. But with the use of technology, both time and cost will be saved and disbursement of loans to SMEs will automatically become viable.” He concluded that this issue is being resolved by fintechs, NBFCs and banks as well.

Shankar Subramaniam offered yet another perspective, based on Bank of America’s presence in India, “Obviously, the SME segment is not a direct target market for us, due to the capacity in which we operate here. The play for us in that space is more from the supply chain angle, especially if it becomes more institutionalized.”

Manish Kothari conjectured that the biggest pain points for SMEs are the TATs and the lack of transparency in processes. Explaining it from the point of view of a bank, he said, “Where collections are concerned, it is possible to use direct debits or some digitised form of collections. However, documentation in India, as it exists, cannot be easily digitised. So the challenge becomes bringing in efficiency in bits and pieces.” He concluded that ‘press of a button’ lending models are definitely a while away.

Emergence of AI
Taking the discussion to another level, Harshit Jain said, “AI is becoming a buzz word and implementation of AI at banks is by knowledge workers. But how open is anyone to go ahead and transfer their knowledge of a system to the bank, knowing that it will eliminate their jobs?” This conflict could impact TATs. However, in today's era of global networks and real-time transactions, AI can play a big role in mitigating risks.  In fact, we have built AI-powered platforms for SMEs that can indicate duplicate transactions that alert the promoters when the accountant may be a bad apple. Who is going to pay for such innovation and application of emerging technologies, like AI and APIs, is something that the banks and their customers have to be clear about.

Rajesh Lahori pointed out that AI is helpful up to a level. It runs offline and could determine the credit worthiness of prospects. However, the marketing team has to take over from there and convert the prospects into customers. Agreeing that the architecture of the system as a whole must be revisited, Sachit Sahni added, “There is a philosophy that you can’t digitise on legacy platforms. However, the power of digital should enable the use of all those millions of systems implemented at different times.”

The NBFC Perspective
Lending an NBFC perspective, Sabyasachi Rath recounted, “Our customers are completely different; they belong to the micro, non-corporate business segment. We have to get to know our customers’ businesses at a ground level and stay physically in touch with them. We need a combination of physical and digital skills and infrastructure for success.”

Ongoing Digital Solutions
Towards concluding the discussion, each panelist described their respective bank’s efforts to launch the next great digital innovation that could change the world of SME lending. According to Sumit Gupta, Yes Bank has launched a mobile MSME app, which enables enterprises to track both their assets and liabilities online, allowing them to dynamically review the state of their cash flows and balance sheet. Manish Kothari explained how Kotak Mahindra Bank was working towards creating a model, based on its existing data, that would enable it to immediately inform SMEs who have applied for credit whether it is sanctioned or not. Sabyasachi Rath shared how Essel Finance Business Loans was also looking at reducing the approval intimation time for micro loans (Rs 2-3 lakh) to just about 10 minutes. Harshit Jain highlighted how Nucleus Software's integrated transaction banking suite - FinnAxia - has been helping financial institutions digitise both their back  and front end systems, ensuring operational efficiencies and an enhanced end user experience. Sachit Sahni recounted how IndusInd Bank was currently running a project which entailed reviewing every process of the bank to delineate the customer touchpoints so that each of these could enhance the overall customer experience. RBL Bank, Rajesh Lahori mentioned, was also working on digitally fine-tuning its customer experiences and digitising a lot more processes.

From his experience, Vikas Dimri concluded saying, “Let’s not lose perspective of the fact that digitisation is adding value to the world right now. It is not just about automating processes; there’s significant value being added irrespective of how it is implemented.”