With a High Loan Approval Rate, Alternative Lenders Are Easing the Credit Burden on Small Businesses
MEDICI's Diwakar Mandal shares the factors of a strong economic growth, rising interest rates, and a growing digitization in the lending space by the emergence of alternative lenders that have been key drivers of growth in SME lending. He says, banks have traditionally been a custodian of customer relationships in the SME lending space. However, there has been a significant reduction in their risk appetite after the global financial crisis because of which they have been increasingly cautious on lending to small businesses, especially newer businesses which lack a strong credit history.
Small banks, on the other hand, show a different side of the coin. The approval rates of smaller, community banks and credit unions are in the range of 48%-53% and 40%-45% respectively. The local, community banks, and credit unions are a step ahead of the other lenders in terms of their relationship-based lending. Their credit decisioning and loan approval is characterized by local ownership, control, and decision-making. They can make lending decisions based on personally knowing the character of the borrower, the collateral, and the needs of the community. This substantiates a significantly high level of approval rates on the side of these smaller banks and credit unions. However, these small banks have their fair share of challenges including limited capital, higher impact of regulatory scrutiny, etc.
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