Credit deployment to MSMEs under the priority sector lending by scheduled commercial banks in February 2024 grew by 19.3 per cent to Rs.24.42 lakh crore from Rs.20.46 lakh crore in February 2023, according to the latest data on the monthly sectoral deployment released by the Reserve Bank of India (RBI).  

As lending volumes grow, banks tend to prioritize customer acquisition over other critical aspects. Enhancing customer experience, managing operational risk, and optimizing end-to-end process efficiency are often overlooked. Many still rely on outdated business models, need for physical assets for collaterals, and legacy processes, even treating MSMEs as corporate entities. This approach overlooks the unique needs of these businesses, resulting in missed opportunities and banks not realizing full potential of the market.

There is no one-size-fits-all approach for every bank and market, but those that rethink their MSME-lending strategies can increase market share and promote profitable growth. The ideal operating model combines the right technology, innovative ways of working, faster decisioning, personalized offers, and a customer experience that the customers are experiencing from other tech giants.

Given that there is no one-size-fits-all solution to credit-lending models, banks and lenders must tailor their lending processes to align with their unique aspirations and business objectives. To navigate the optimal transformation journey for their specific missions and markets, banks should consider essential elements across key building blocks including‍

1. Faster Product Launches:• Streamline product development processes to quickly introduce new lending products tailored to MSMEs.

• Utilize agile methodologies to adapt to market changes and customer needs promptly.

2. Digital Journeys:

• Implement seamless digital onboarding processes to enhance the customer experience.

• Provide end-to-end digital loan applications and approvals to improve efficiency.

3. Enhanced Customer Experience:

• Focus on user-friendly interfaces and intuitive platforms.

• Offer comprehensive notifications to the customers through every phase of loan approval journey.

4. Personalization:

• Use decision tables, decision trees, data analytics to offer personalized loan products and services based on the unique needs of each MSME.

• Develop customized repayment plans and financial solutions tailored to individual business circumstances.

5. Faster Decisioning Cycles:

• Integrate providers of financial services like KYC, credit ratings, bank statements, etc. to fetch eligibility data and validate faster for a quicker decision cycle

• Integrate AI and machine learning to automate and expedite credit decision processes.

• Reduce manual intervention to shorten approval times and enhance operational efficiency.

6. Alternate Scoring Models:

• Employ alternative data sources, such as transaction history and cash flow activity, to assess creditworthiness.

• Develop predictive models that provide a more comprehensive view of an SME’s financial health.

7. Collateral Management:

• Implement efficient collateral management systems to streamline the evaluation and monitoring of pledged assets.

• Use technology to track collateral value and ensure adequate risk coverage.

8. Risk-Adjusted Pricing:

• Utilize advanced analytics to set pricing based on individual risk profiles.

• Offer competitive rates that reflect the true risk associated with each MSME borrower.

In conclusion, reimagining lending to the MSME sector in India requires a strategic overhaul that aligns with the unique needs of these businesses. By adopting a tailored approach and leveraging the latest technologies, banks can enhance customer experience, streamline operations, and ensure efficient risk management. Integrating elements like faster product launches, digital journeys, and personalized services will not only optimize lending processes but also unlock significant growth opportunities. As banks embrace innovative models and advanced analytics, they can build a resilient, customer-centric lending ecosystem that drives profitable growth and meets the evolving demands of the MSME sector.