This business is transforming access to finance for SMEs – here’s how.
Too small for commercial banks, too large for personal microfinance, SMEs have struggled to access the finance they need. But 'non-bank financial companies' can fill the gap so SMEs can continue the economic activity vital to rural communities and poorer urban ones.
Small and medium-sized enterprises (SMEs) are responsible for 33 per cent of GDP in Africa and South Asia and, when informal businesses are included, as many as 90 per cent of jobs. SMEs serve consumers in rural communities and poorer urban areas that lack the infrastructure needed for large business or public-sector activity. They are also important to progress economic development.
However, their greatest challenge is accessing the finance they need to grow. They are often too large to be served by microfinance institutions, who mainly provide credit to individual low-income borrowers. And commercial banks tend to focus on larger businesses, often seeing SMEs as high risk and costly to serve given their diverse financing needs and lack of a ‘one-size fits-all’ approach. Commercial banks and lenders also usually require formal registration and documentation which SMEs are often unable to provide.
As a result, SMEs in low-income and lower-middle-income countries face a $930 billion financing gap, according to the World Bank. And 80 per cent of micro, small and medium businesses (MSMEs) remain underserved by formal financial institutions. Which means this type of business is often trapped in a vicious cycle. Poor accounting records prevent them accessing formal credit, so they use local money lenders at higher costs. This in turn leads to poorer cash flows and an even higher risk profile when it comes to finding formal credit. To address this challenge, businesses called ‘non-bank financial companies’ are providing SMEs with an alternative to traditional bank financing.
• In the last three years the business has grown from providing finance to 12,000 customers to more than 51,000 customers
• Veritas’ move to new automated systems is allowing the company to approve more loans to businesses – 1,400 loans a month, up from 800
Veritas provides finance to more than 51,000 SMEs
One of these, Veritas Finance is providing small loans in India to what is known as the ‘missing middle’, MSMEs. It is specialised in supporting SMEs, and as a result Veritas’ customers are mainly first-time borrowers (certainly of formal finance) who it helps build a credit history and improve financial discipline and planning. This allows them to later access the formal credit system more easily.
Over the last three years, Veritas Finance has grown from providing finance for 12,000 customers in three states, to more than 51,000 customers in nine states. This has included expanding into more challenging Indian states, where there are few similar finance companies.
Our technical assistance facility, CDC Plus, has helped the company move from a paper-based system to a digital and automated system of assessing small business owners for working capital or loans. This means they can approve more loans to businesses – 1,400 loans a month, up from 800. They have also cut turnaround time, from loan application to disbursement, in half. The change cut costs for Veritas Finance too, with fewer customer visits needed before they make loans.
We invest in a diverse range of financial services so that alternatives to traditional bank financing become available to SMEs. These include fintech companies as well as specialised non-bank financial institutions like Veritas.
Moving to new automated systems is allowing Veritas to approve 1,400 loans a month, up from 800