Neobanks: The Ideal Partner For Indian Smes

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Despite the economy's challenges, India's SME sector has the potential to drive innovation and job growth. However, it is hampered by a lack of credit through online payment gateway because small business owners do not keep proper books of accounts and, in some cases, do not have sufficient business experience. Lending risk is difficult to justify for banks and other private lenders, who are currently experiencing their own liquidity crisis.

Historically, the share of SME lending in large Indian banks' overall portfolios has been rather small, so they appear to be taking a wait-and-see approach in the current economic scenario.

Here Are the Problems Faced by SMEs

Low Collateral Assets
To meet working capital requirements, SME owners are frequently forced to collateralize personal assets, trapping them in a vicious debt cycle. They have little choice but to do so in the absence of credit.
A decrease in demand is also to blame. Many Indian SMEs work as Tier II or Tier III subcontractors to larger firms in the manufacturing and FMCG industries. Any fluctuations in demand have a cascading effect ...
... on SMEs, which find it difficult to maintain production in the absence of a minimum number of orders.

Informal Credit Sources
Due to the ongoing liquidity crisis, banks are reluctant to risk defaults and NPAs, even as the government takes steps to increase priority sector funding. In a positive sign, NBFCs have begun to outperform public sector banks in providing loans to SMEs. However, SMEs continue to seek funding from traditional lenders, often at exorbitant interest rates.
According to a recent IFC Intellecap survey, 84% of India's SMEs rely on informal sources of capital to meet their needs.
Some of these SMEs are eventually forced to liquidate their assets in order to repay their loans, resulting in a social-economic crisis for retrenched employees from India's most vulnerable rural communities.

Opportunity for Digital Banking Solutions
A new entrant on the SME lending stage, however, promises to change all of that. Neobanks, the most recent evolution in the FinTech space, are making rapid inroads into an underserved market valued at $240 billion by IFC Intellecap. The obvious appeal for SMEs is that Neobanks are much easier to deal with in terms of loan documentation and credit checks.
Furthermore, they provide low-cost loans with customized tenors, making them ideal for meeting both routine cash flow and capital needs.

What Do Neo- Banks Bring to the Table?

Low-Cost Banking
Neobanks have begun offering collateral-free loans with flexible repayment terms. Neo banks can afford lower margins because they do not have physical branches. They have also made the loan application process simpler, making it easier for SMEs to obtain credit. Because neobanks are unregulated, they are not subject to the restrictions that traditional banks and best online payment gateway must follow.
This enables them to provide tailored solutions to SMEs, which are deemed too risky by traditional banks.

Alternate Risk Management
Neobanks are assisting traditional lenders in developing alternative credit risk models for small businesses that lack a proper credit history. On the other hand, they are taking the lead in teaching SME business owners the fundamentals of business finance, such as budgeting and accounting.

This is raising SMEs' awareness of alternative sources of finance, such as invoice financing, to fund working capital requirements.
Neobanks have significantly reduced the average time it takes lenders to process loan applications. They are making banking more transparent and responsive for SME business owners by using insights derived from social media, online payments, and even POS transactions.
These alternative credit scoring techniques have enabled Neobanks to provide more flexible payment options while also better managing credit risks.

Automating Books of Accounts
SMEs have been denied business credit primarily because they are new to the formal banking system. Because they cannot afford to hire a professional accountant, SMEs are frequently unable to demonstrate their financial solvency. As a result, they are unable to obtain loans through initiatives such as MUDRA.

Neobanks intend to solve this problem for SMEs by automating and streamlining invoices, balance sheets, accounting, payroll, vendor management, and so on.

Neobanks also assist SMEs in reconciling payments, managing cash flow, and becoming financially disciplined. They generate a slew of reports to assist owners in cutting operating costs and increasing margins. Simplified tax filing features provided by neo banking apps save SMEs time and effort.

Single Payment Gateway
When dealing with traditional banks, SMEs and businesses in general are forced to use a separate payment gateway. Neobank apps, on the other hand, integrate multiple bank accounts into a unified gateway, allowing business owners to view categorize expense reports and manage their accounts from their mobile devices.

Neobanks also provide simple integration with a variety of third-party business applications via APIs and plug-ins.

Customer Experience
Neo banks have focused on providing an exclusive customer experience in order to gain market share. Time is of the essence in business, and entrepreneurs value speed and consistency in financial services. Ecommerce sellers and IT outsourcing firms, for example, require faster turnaround times for international money transfers, which traditional banks may be unable to provide.

Neo banks, on the other hand, provide instant payment services, including international money transfers, at low or no cost. Their dedicated payment gateways expedite transactions that previously could take up to 2-3 business days to complete.

Conclusion
By 2025, neobanks are expected to control a sizable portion of the SME lending market. Because of their agile and customer-centric business philosophy, they provide small businesses with unprecedented flexibility. Increased access to banking services may finally enable Indian SMEs to realize their full potential in terms of innovation and job creation.
Neobanks may play an important role in financing the growth of the SME sector. Given the promising prospects, traditional banks are already jumping on the digital banking bandwagon in order to compete with neo banks.