The SME segment in India has been a consistent bright spot and engine for growth over the last several years.
According to government numbers, the micro, small and medium enterprises (MSME) sector has been growing at least 10 percent annually since 2015, and punching above its weight in terms of its contribution to the economy has a whole. All in, the segment contributes nearly 38 percent of the nation’s GDP, employs over 100 million people, accounts for 45 percent of India’s manufacturing output and comprises about 40 percent of its exports.
It is also a segment that has proven resilient in an economy that is rapidly modernizing to digital from nearly entirely cash-based. SME owners took a hit as a result of the rapid – and at times chaotic – demonetization push that Prime Minister Narendra Modi announced in 2016 with nearly no advance warning.
Small and medium-sized business were shaken again last year when the implementation of a nationwide goods and services tax (aimed at replacing a series of regional varieties) was somewhat less seamless than initially advertised.
And in recent months, Reuters reported, they seem to be facing something of a credit crunch when it comes to the nation’s banks. Between February to March, lending to small businesses fell by 0.2 percent, despite the fact that lending in the economy as a whole picked up 5.9 percent. Lending to small businesses in the same period a year ago grew by 5.8 percent.
That slowdown comes largely as fallout from the PNB banking scandal disclosed in February – and the revelation that the bank had been the victim of a massive fraud. Reports indicated that the fallout from that scandal has seen banks cracking down on their underwriting, and in a way that has hit small businesses particularly hard.
“It is suffocating,” SME owner Chetan Hemani told Reuters. “When influential people defraud a big bank like PNB and run away, there is nothing they can do. All they do is to squeeze retail borrowers.”
Hemani, despite having a long, solid relationship with his financial institution, the state-run Canara Bank, was unable to secure a line of credit earlier this year. Canara Bank denies it has made any changes to its underwriting in regard to the PNB scandal, but the proof is in the figures: The bank lending picture in India is a good deal more difficult than it was 12 months ago for SMEs.
But as bankside lending has hit a speedbump, FinTech is expanding its interest in the space, as evidenced this week by PayMate’s big acquisition of Zaitech Technologies Pvt. (Z2P), a real-time digital lending platform that uses social and banking data along with proprietary analytics and AI to analyze and underwrite SMEs.
“Until now, we were more a payments company — which was loosely facilitating credit through banking partners. Now we want to get deeper into lending,” PayMate founder and managing director Ajay Adiseshan noted in an interview.
Though PayMate has previously made some light forays into SME lending with banking partners, he noted that the firm is ready to take the next step forward in helping their customers manage and maximize advantage with their cash flow. And, Adiseshan noted, they really know their customers, and have a lot of very specific and granular details about their financial lives.
The firm’s primary business lies in the automation of payables and receivables, as well as end-to-end reconciliation services, with a sideline in digital integration of things like invoices. In total, PayMate has about $3 billion in transactions flowing through annually.
That’s a lot of data to work with, Adiseshan said – and with Z2P expertise in evaluating and discovering low-risk lending opportunities in real time, PayMate will really be able to unlock its data and use it to build an even greater value for their merchant partners.
“Since our payments solution is deployed in the supply chain of merchants, we see repeat transactions through our platform, which enables us to evaluate these entities in a more holistic fashion,” Adiseshan noted. "We are able to keep the risk profile low with repeat customers and repeat business. Our game plan is to stay within the realm of the supply chain ecosystem.”
The acquisition will be a cash and stock deal, though the specific amounts remain undisclosed. The firm’s 10-member team will relocate to Mumbai (where PayMate is headquartered) when the deal is finalized.
“Technology and data-driven, actionable intelligence for lending, along with machine learning, is what Z2P has built over the past few years. We look forward to joining the PayMate team and marrying our credit and payment technologies, along with our experience, to enhance the quality and flow of credit to SMEs in India,” said Rajat Yadav, founder of Z2P Technologies.
PayMate has had a fairly exciting and high-profile year. In February, the firm announced a partnership agreement with Visa that enabled them to provide a B2B payment platform for joint customers, including small and medium-sized businesses (SMBs) struggling with managing manual payment methods like checks and cash.
With the Z2P acquisition, Adiseshan noted, PayMate can now offer merchants a richer set of tools to better manage their cash flow and ultimately grow their businesses.
“We will leverage Z2P and PayMate’s technology and analytics to speed up the credit application and the credit decision-making processes for SMEs, and provide supply chain financing solutions to our large corporate clients,” he noted.
As for what’s next?
Growth, unsurprisingly. Today, PayMate has 20,000 users on its platform leveraging its automated B2B payments solutions. By the end of the year, the firm hopes to have grown that figure to 75,000.
And their timing may be just right in terms of when to pitch a growth campaign – scandal aside, reports indicate that small business lending may be in for an extended rough patch within India. Lenders these days do not want to be caught in a scandal, and are facing pressure to be extremely conservative.
“I cannot give loans on relationships – we need to be strict, or else after a few years, I might be arrested,” a branch manager told Reuters on condition of anonymity.
He said there was “a lot of pressure” from regional head offices to follow rules to the letter.
It seems like the perfect environment for FinTechs to enter with alternative offerings.