Most of the fintechs who are in the digital lending business in India today are lending to SMEs, according to a report in Banking Frontiers titled ‘Digital Lending: credit bubble or not’. The report suggests that while analysts and economists believe the next growth will come from SMEs and MSMEs, it is not easy and quotes Piyush Khaitan, founder and MD at NewGrowth a digital lending platform as saying: “Property rents are rising and that is the biggest problem for SMEs in major cities, since a major portion of their borrowings goes into serving the rent.’
The report says the SME market is huge but not all of the SMEs are eligible to borrow from conventional financial institutions due to weak credit score. Many of them borrow from non-traditional sources paying exorbitant interest. Fintechs as well as microfinance companies want to be the alternative source for funding for these SMEs. But this quick digital lending model has its drawbacks too. Competition is increasing and currently there are more than 1000 companies operating in the lending space, offering their services to growing businesses and individuals. While there is a potential, such a large number of companies does not fit in. Mid-level and small companies may have to struggle hard specifically when they do not have enough investments. Also, cost of funding is a big challenge for small companies compared to large institutions.