- SMEs contribute significantly to GDP and job creation
- Trust is a major barrier for SMEs in accessing finance
- Credit score alone is insufficient for assessing the financial feasibility of SMEs
- The potential for SME financing is enormous
- Collaboration between fintechs, governments, and institutions is crucial
Some other titles we considered for this episode, but ultimately rejected:
- Credit Score Is Stale the Moment It Is Created
- Bridging the Gap: Financing SMEs for Growth
- Driving Economic Growth through SME Financing
- Transforming SME Financing: The Power of Alternative Data in Assessing SME Creditworthiness
- The Role of Trust in SME Financing
Read the best-effort transcript
Read the best-effort transcript below (This technology is still not as good as they say it is…):
Michael Waitze 0:05
Sure, sure. And let’s go. Okay. Hi, this is Michael Waitze. And welcome back to the Asia Tech Podcast. We are joined today by Shrikant Patil, the CEO and Managing Director of DigiAlly. Thank you so much for coming on the show today. I really appreciate it. And before we jump into the sort of main part of our conversation, why don’t you give our listeners a little bit of your background for some context.
Shrikant Patil 0:30
Wonderful, Michael. And it’s such a pleasure to be here. You know, your shoe show has been making waves, and very glad to talk to you. My background has been largely in the consulting world, mostly work with organizations which are leading in digital transformation, including Boston Consulting, group, Accenture, Oliver Wyman, IBM. And then over a period of time, I realized that there has to be a very important problem to solve, right? They looked at small medium enterprises. And that’s where solving access to finance for SMEs became one of the problems I thought I could contribute to. And that’s why I DigiAlly, do you mind
Michael Waitze 1:17
if we talk a little bit about numbers if you have them available? Just so people can get a sense for this right? I think when people think about the amount of GDP that gets created, globally, but even regionally, they just think it is gigantic companies that are doing it. But maybe we can talk about like what percentage of GDP in Indonesia, in Vietnam and Thailand or in this in the Philippines in this region is actually created by SMEs and then why that finance access is so important to them.
Shrikant Patil 1:44
Absolutely, you know, I give this example that, you know, when India sent Chandrayaan the moon mission, right, people, very few people know that there were 300 small medium enterprises, who contributed to taking the making this moon mission happen. And across the world 50% of GDP is created by small medium enterprises. 66%, which is to two out of three jobs are offered by small medium enterprises. And which is a very important number, because why we talk about the employment, and we talk about growth, employment is what keeps the economy stable. So providing two out of three jobs is a very big contribution which small medium enterprises have. And 90 to 95% of companies across the world are actually small, medium enterprises. So it is a tremendous contribution. And some of these things which we don’t see it, they are not visible. You know, most of the companies we see are the large, big brands. But SMEs keep working very silently, very hardworking. And that’s what is keeping the economy together across the world. You
Michael Waitze 3:06
know, it’s so funny when I was working at Goldman Sachs and Morgan Stanley. I spent so little of my life, like out in the real world, because most of it was spent in the office from like six o’clock in the morning until eight o’clock at night. And on the weekends, it was almost like being in the mafia. On the weekends, we only spend time with like people that worked at Morgan or Goldman and went to their houses. But now that like I run my own company, I literally exist, like in this really large economy. And I walk around the street, sometimes I’m like, I wonder what that guy does. Because he’s not working at a bank. He’s not working at an insurance company. He’s not, you know, working at some big firm, he probably also has his own business. And that is the definition of what an SME is. Right? So there’s this whole world out there that I think most people don’t even know exists. And maybe, can you talk about why the finance part is so important? And I think there are two big things here. I think. One is like just to finance ongoing operations, right? That’s the first but the second is, maybe there’s a way to innovate around payments to employees to make their lives easier is what like there’s a lot of stuff I think you can do once you understand like what’s happening in that space. So maybe you can give us some advice.
Shrikant Patil 4:18
You know, I just want to also show the challenges which SMEs face right and one of the simple number is five out of six SMEs across the world while they contribute so much we talked about it just few minutes ago, they are out of coverage for financial institutions for lending or access to finance. You see a large percentage of money, so almost 90 to 95% In some countries, is actually being lent to large corporates. So which means that there is single digit percentage, which is given to these small and medium enterprises to Grow. I mean, you can imagine as an entrepreneur, right and very well, very important point, which you mentioned, Michael, that when you turn entrepreneur, you realize the value of how important it is to have the access to finance because you need to pay your employees on time you need to pay your vendors, you need to do multiple other opportunities for growth, you are not able to take a certain project If you do not have right funding. And you can imagine that, in spite of having these challenges, they are creating 50% of GDP across the world. Right. So it’s extremely lopsided in terms of where the fund flow should be. And this is also true for for startups. And some of this gets much more difficult. So for example, women entrepreneurs, face huge discrimination. And their funding scene is even worse. Yeah, so women entrepreneurs have to make five trips to the bank, as compared to their male counterparts. And some of these data points are very important for us to understand how we can change the society and what impact just by giving access to finance to small medium enterprises, having trust having faith in them can create across societies and across the world.
Michael Waitze 6:29
So we can talk about, you know, discrimination against minorities and against women and stuff like that. We can talk about that too. But let’s just back up and talk about if the world knows that the SMEs are contributing 50% to GDP globally, why are they lending 95% of their money or 97% of their money to big companies? Is there like what’s the reason why, and then how does that get fixed?
Shrikant Patil 6:52
One of the main challenges is about the information. And you see that large corporations have lot of information data available, which companies can access, and they can very easily make decisions. That is a very interesting paper which Bank of England has created. It is about the symmetries of data. So the asymmetry is state like this, that borrower always knows more about themselves, as compared to the lender. And because of this symmetry being extremely high in case of small medium enterprises, the trust between them and the ecosystem players. And this is not just about lending, this is also about the other partners, which they might be open for developing. This is also for when they want to do trade with certain organizations, when they want to get customers or suppliers or some of their projects. They have to establish this trust. Fundamentally, if you look at today, what SMEs lack is not just the capital, but the trust. And that trust deficit is something what Digi ally is trying to solve for through our trust score. But our fundamental principle is going back to the report which Bank of England created. It is about having a platform which connects the small medium enterprises translate the data from small medium enterprises into a meaningful way for the banks and financial institutions or large corporations to consume. And if that happens in a seamless manner, there is no reason for the large corporations not to trust the smees. And that’s how we are solving.
Michael Waitze 8:41
Again, getting back to the big companies where I worked in frankly, the large companies where you worked, there was no there was no data deficit, if they wanted. And I worked in the controls department when I first started working at Morgan Stanley. So I actually created reports, I know what this was like. And I know what we had. And this is when I first started it was 30 years ago. How do we make it possible? And how does digital I make it possible for small firms that don’t have? What’s the right word, the resources, maybe to build their own systems, right? To use another system to put their data in a format that makes it easier for the banks then, and I’m using banks as a proxy, right? To trust them, because you’re right at some level. It’s not that the banks don’t want to work with them. It’s just they don’t have any way to understand how much they can trust them. So maybe you can just walk through that. And then talk about what trust core is, from a systemic standpoint so I can get a better sense of what that is.
Shrikant Patil 9:36
Absolutely. So if you talk about today’s McAfee aneurysm, right, and we need to understand where we are today. We have been following a mechanism called credit score and credit assessment. Fundamentally, if you think about the way banks operate today, I would like to turn it upside down. You know, the way they look at customer is they say, Hey, can I actually To sell something to this particular customer, instead of thinking about what is my, what is the potential and what is the possible relationship I can have with this particular customer meet an SME or an individual. So, the journey today is banks actually try to sell a particular product. And, you know, if you go and see different banks, you know, they have accounting products, they have saving product, they are lending products, there’s hardly any differentiation today. And that leads to a challenge that banks don’t see, the bigger picture, the potential the SME has, the intent the SME has and the integrity the SME has. Which means that they need to change the perspective of looking at the back at an SME or a customer to say, hey, is this the right customer for me, can I create a longer and larger customer value out of this relationship. And today, if I just focus on credit score, and I mentioned this on multiple forums, to me credit score is still the moment it is created, because it based on the financial data. And it’s like driving the car by looking into the rearview mirror, it does not give you any future predictive analytics. The way we are solving this problem is we are looking at not only just the financial data, but we are looking at also the non financial data that signals which today human mind may not be able to analyze, but there is tremendous amount of non financial data like promoter information, ESG score, social media score, which is coming in, and that data is being analyzed. You also have partnerships with companies which for which our forward looking information, right, if this industry is going to do well, is there a geopolitical risk. So the way we solve this is by coming out of this perspective, narrow perspective of saying, hey, just look at financial data and make a decision versus we have a holistic view across a spectrum of information, which is available around at SME, which is non financial data, futuristic data, and then feeding this into the AI model, which is trained over 1000s of SMEs. Because as a human mind cannot comprehend the causal or correlation, correlation between different data points. So we need to use AI in this. And that is what dgla has done to to help the SMEs as well as banks and financial institutions to make better decisions.
Michael Waitze 12:41
Do you have any? I mean, it’s a fascinating topic, right? I’m curious if you have any real life examples of an SME, that worked with you that was on the platform? Do you know what I mean? And that went through all these things where you took other non financial data, understood what its cohort was, and said, Somebody should be lending more money to this gal, because she’s growing really fast. She’s in a place where there are no Geopolitical Problems. Her market that she’s attacking is exploding. And then what happened to them from a lending perspective and in the growth perspective, because I wrote down these two words virtuous circle, if you can do that you should create this virtuous circle. No. So if you can give an example or two, that would be great as well.
Shrikant Patil 13:22
We have two examples, which are in public domain. And I’m going to quote those again. So one of the clients who actually came to us as a as an enterprise, which is close to a million dollar tech company. And one of the things which is really surprising about these SMEs. And one challenge, which all SMEs are starting to face is that they don’t know how they’re doing. What is their performance scorecard. And if you think about the value add we give to these companies is we tell them look, you are either a platinum company, gold company, silver or bronze company. So the first thing that happens to anybody is that they know that how they’re doing right and you know, as soon as they know about this, the perspective about hey, I shouldn’t be going to tier one banks or I should be going to companies, which are non finance, non banking companies or some FinTech which offer very high rate of interest, you know, that decision can be taken. So, for an SME, when we did this assessment, that SME was very clearly able to identify that they are a gold company and they knew that the cost of capital should not be very high. Otherwise, they could have gone the easy route, where they would have paid very high interest rate, not knowing that they are a gold company, they would have paid interest rate for for a bronze or a silver company. So that is a very, very powerful contribution. We believe we made to that particular SME As the other one from a banking side, we help one company to one of our lender, lending partners to assess companies at the global scale. So there are two unicorns. So we did finish two projects recently, two unicorns, one is based in Singapore, one is based in India, okay. And we had we could do their global footprint assessment. So when they came to us and said, Is this company worth giving a loan. And our recommendation was based on studying 10 companies for the first one, first unicon, and around six to seven companies, which were distributed across India and Singapore, studying their complex structure and giving the recommendation on and that is where we could enable a consortium based lending to some of these organizations. So these are two examples we’re very proud of, and very happy to share some of that also, the clients have gone ahead and given us the recommendation on public domain.
Michael Waitze 16:05
The banks themselves or just the lending institutions themselves are also not clear right on who they should and should not be dealing with. The value obviously to the SME for what you’re providing is high, and that’s obvious to them. But at the end of the day, you’re not making loan, you’re not doing the lending, some other institution is doing it right. So they also have to see value. What is it like from their side, when they finally see what a second, we’ve been making? 95% of our lending to these types of companies, and 50% of the GDP is here, and five out of six jobs, like all these statistics than to like, and then in the last year, we’ve lent to these five SMEs, because we’ve used this new paradigm, shouldn’t we be doing more? Is the response you get or not?
Shrikant Patil 16:49
If we look at the SME business, yeah, today, the potential of SME business for banks and financial institutions is huge. The overall gap for the as per the World Bank numbers is $5.2 trillion dollars, it’s it could lead to around $300 billion of share profit, and they are not able to tap into it. Now this $5.2 trillion is becoming $5.7 trillion this year. Right? So it’s not going down, right?
Michael Waitze 17:22
India has 1.4 billion people in you know, pick a number. Africa has one point something billion people I know, it’s 51 separate countries, but as a landmass. Indonesia has 270 million people in Southeast Asia has, you know, 670. So now you’re talking about three, four, almost four and a half billion people that are just fundamentally getting richer, just like slowly but surely. And all of those economy is going to be driven by SMEs. So you’re right, five point 2,000,000,000,005 point 6 trillion pick a number, it’s just going to keep getting bigger. So tell me like how, how this gets fixed at scale, right? Where the lending is no longer 95% One way and 5% the other way, but 5050? If that’s the way the GDP is broken down, and then I’m curious, like, what are the economic impacts for the world if that actually happens?
Shrikant Patil 18:14
There is going to be tremendous positive impact, right? I mean, think about the frictionless transactions, today, what is happening is because of the lack of trust, which when a particular SME goes to a bank or when a customer comes as they approach somebody, as a customer, they always face this form of discrimination, that hey, you are not a large organization, you are not a very well established organization, how do we give this particular project to you? How do we give this loan to you? Right? What if, you know, there is no tomorrow, you know, 90% 95% of the startups and SMEs fail, right? So there’s always they’re always looked with this perspective of the saying, Look, we don’t know you, or we can’t really assess you very well. So, as I mentioned, the trust aspect is something which we need to create, we need to solve for the aspect where we should not just assess the credit part of it, but we should assess the credibility part of it, we should assess whether there is a potential there is intent, right integrity of the company, and then give that trust. Now there are certain governments across the world have recognized that, you know, because of many things which have happened, pandemic, we facing the war, across different regions, you see that the fastest growing segment for the next decade will be small, medium enterprises. And that’s what governments have really understood. They are trying to put SMEs under the priority sector lending, which is what many governments are actually pushing for. At the same time. From an SME perspective, there is a lot Out of legislation, which is required that, you know, they need to be also aware of some of the processes, they need to train themselves. One of the challenges, which we see is a lot of these SMEs, they, they think that, you know, hey, running a business is, is simple, right? You know, I mean, I don’t need to learn anything, you know, but there are so many things personally, this is my fourth company. But I have learned so many things just by being an entrepreneur with some of those. I did not or I could not learn in the consulting world where
Michael Waitze 20:33
they couldn’t learn unless you’re actually doing yourself. Look, this idea of financial not inclusion, but a financial literacy is actually really important, too. I mean, you mentioned this earlier, when you said, some of these companies don’t even know how to assess themselves, right. And I think if you look at most SMEs, their family businesses, I think, at some level, and they’re just thinking, I don’t have a job, but I have a way to earn money for my family, and they’re just constantly going without a lot of time to analyze. So is there a way like does, what is the what is digit ally itself do not on a project basis, but on an ongoing basis, right? Where one SME tennis means get together, whatever it is, they can use a platform that helps them not just today, but helps them forever? Don’t even because these are all these resources, this is what’s happening in the world right now. Right? Is it companies are abstracting away functionality from other businesses and saying, Don’t build your own thing to do that just use ours for it’s cheaper, $10 a month, whatever it is, and then everybody uses it. Like, what are you doing for this ongoing support?
Shrikant Patil 21:41
Clarify, at this juncture, we are not offering solutions to small medium enterprises that our customers are our large organizations, which are banking, financial services, supply chain companies, and those organizations want to curate their supply chain, insurance companies want to do pricing on that, right. But eventually, what is going to happen is that our idea is to not only just do the scoring once, and let me kind of just, you know, open up the box by saying when we do the scoring, we are also assessing the SME on 20 dimensions, which would be about their promoter information, the way they are running the company governance around that company. So there are 20 dimensions, they not only know that this is a score, which is good or bad, but they know where they are good at and they they need to improve.
Michael Waitze 22:37
Yeah, which is almost as important or more important. Yeah, absolutely, absolutely.
Shrikant Patil 22:40
So that score in absolute sense, may just give them some level of information, but what is important for them is that deep dive information, and they have an opportunity to come back. So let’s say even if their loan is rejected right by the financial institution, they have an opportunity to come back and say hey, you know, if I improve on these these five parameters, you know, I can still get a loan right i My score can go up right, that is the visibility, and that is very important for us to keep the artificial intelligence, the AI predictive model explainable in in these ways. So we know exactly we we talk about the weights which are given, you know, the importance which is given to each of these parameters in the in the model itself, so people know exactly where they stand with this. So our idea is that over a period of time, when SMEs know that they need to do this, and they are benefiting out of it, they themselves will push for it, small medium enterprises, the lenders, also we’ll get a chance to also do the portfolio assessment because we offer portfolio assessment of their existing customers, which is, which could be a large scale assessment, as well as we held them for collections. So this entire value chain, for the banks and financial institutions we can cover where SMEs can constantly revisit their scores and update it.
Michael Waitze 24:04
There must be a massive opportunity for someone to create this platform, right? That does this for SMEs and even for micro SMEs in this region. So they don’t have to build all their own financial tools themselves, right? Sure. It’s great for them, to work with you to work with governments and stuff like that. But the the idea that there should be a platform for them to plug into and get the same type of information that you’re talking about on a daily, hourly, weekly, monthly, whatever it is basis, again, for all of the reasons that you’re talking about, right, because yeah, it’s great to know that I didn’t get my laundry, why? I know I’m good at these five things, but I need to be better at these seven things is also super useful information to have on a regular basis. Do you run into startups? Do you not I mean, when you’re dealing with the banks and these large institutions that are going like oh my god, you should deal with all of the SMEs that we know about.
Shrikant Patil 24:55
Yeah, so there are when we talk about MSMEs or you know, micro and semis, there are multiple segments which come under, under that. And I would segregate micro a little bit differently, because you know, a lot of them are proprietor companies, partnership companies, and you know, the shops around the corner, the the restaurants on the corner, those are the type of people, and a lot of them actually working very hard. And I’m really proud of them, you know, companies showed or these entrepreneurs showed a lot of resilience during pandemic and you know, over a period of time, but at the same time, some of the basics they are not able to fulfill and which is which may be compliance, which may be about sharing the information with the right bodies, right. For example, in Singapore, there is Accra, which is taking care of the private limited companies, and you know, you have to report everything. Similarly, in India, you have MCA multiple other organization, countries, you have different those entities, the challenge with the micro enterprises is that they don’t actually believe in or they don’t have time, I mean, you know, it’s more about what
Michael Waitze 26:05
I was trying to get before it’s like, what are they gonna do that was when they’re not sleeping there, where
Shrikant Patil 26:09
do they get out of that, right, and then when the time for loan or getting some of these things come in, you know, that is the time they make these transactional activities, which are, which are subsequent to that. But as we see the small and medium enterprises, they have tremendous opportunities, because across the world, you know, you might know this that in Mumbai, the Bombay Stock Exchange, as well as national stock exchange in India, you can list small medium enterprises. So if you have a $1 million, or even less turnover, and you want to list you can go to the, into the bushes and raise money out of that. So on one side, you will see that the micro enterprises are struggling to kind of get some of the basic things in place. But on the other side, the infrastructure for small medium enterprises for raising funds is available for them to go forward for them who take a very structured approach and who fulfill those notes. So there is definitely reward in terms of being compliant, being able to manage your your flows, cash flows, and you know, all of that stuff. How
Michael Waitze 27:17
important is it for you to work together with the governments as well as places where you’re operating?
Shrikant Patil 27:23
So I have a mixed view about what we should when we should work with government and when we should not? I just want to stay away from the fact saying, hey, you know, we cannot do something without the government? You know, I don’t know, I want to tell people that I met also one of the very senior persons Sanjeev Sanyal in in Delhi recently, and I was having this conversation. He’s part of the economic advisory committee to the prime minister. And I was having this conversation with them saying, you know, this is what we are doing. And he said, fantastic, he asked me a question saying, you know, what do you want government to do in this right, you know, and where can government help? And that question itself was not demotivating me it was motivating, it was realized, I realized that, you know, there is so much, which organizations like Digi ally any other fintechs can do without the help of the government. But at the same time, we have to have certain form of blessings or the support as we grow. And as we start becoming more valuable to the society where the government comes into into play. So I think it is a journey where the government will play an important role. But at this juncture, I think we can still create a lot of impact. And we can still help a lot of small medium enterprises, banks and financial institutions to multiply their business.
Michael Waitze 28:50
Government has access to all these resources, right, that it’s difficult for regular institutions to access, that’s a good thing and a bad thing. The other thing is, it’s there are points in time where you want the government to be extremely involved. And then other times, we just want them to get out of the way. And you just have to find this balance between I need you to do this thing, because this is going to then change transformation only for the way these SMEs operate. But once you do that, then just get out of the way again, right. So the big problem, I think, at some level with governments is that they set up things to do X. And then x gets accomplished, but this thing still exists. And it needs to feed itself. So then what does it do next? Right. So you have to find a balance. And I agree with you like, I’d rather have ways for private institutions to do it. At some point, you do need the government just because they have so access to so many resources at scale. But then it’s other points, you really just want them to get out of the way. When you first started doing this right. One of the things you said was you wanted to find something big and interesting to do. You’ve already worked at all these really fancy firms and stuff like that. I think people always go into starting a new business with you know, preconceived notions about what that business is going to be like. Can you talk about maybe One or two of those preconceived notions that you had where you were just wrong.
Shrikant Patil 30:06
I mean, many of them I would not I would not say that, you know, I’m with you as a pioneer you keep learning right? As an entrepreneur, you have to be very nimble, flexible in terms of you know, what your customers are saying. So, for me, you know, as any entrepreneur, I said, Look, you know, we are building this and you know, we are we are going to talk to the banks and you know, we work with certain stakeholders and they will be very welcoming. And having gone through the journey that we have been into consulting, so, it’s more like a b2b sales are meant to be you know, solutions, I did not have a doubt that we will be able to present the problem statement and get the output very well. But then, when we approach some of these customers, we realize that there are many practical nuances, we need to take care of saying, you know, how are we going to replace somebody, are we going to embed and make somebody’s job better, and we have to reposition ourselves with some of the feedback coming in, you know, not everybody wants to do reimagination right. So, how can we do some form of retrofitting right, some form of working with what they have, and you know, bringing our our product and so, that is, that is one part of it, the second part was again, you know, I have had, I was very fortunate, I would say that, we had some phenomenal team coming and motivating us on many levels. So, for me, you know, it was also a surprise, in some cases that, you know, you have to motivate people, and the team management and all those things are also good learning experiences for all of us, right. So, as an entrepreneur, what I have learned is very, there are we talk about funding, and you know, that is the most important, you know, if I have funding then I would kind of make a big organization, but there are other forms of capital other than financial capital, which is network capital. And other one is the experience capital. So, what I have been fortunate to get is the access to network across the world with the background which I have INSEAD and a few other companies, which I worked with, created tremendous network where I can just pick up the phone on any topic and, you know, call people and then they would be advising me, I mean, there is no, there is no formal relationship they might have with the company, they still have this network of advisers, which is helping tremendously. The second one is the experience capital, like a lot of entrepreneurs, so I can, I can tell you that, you know, I’m so well connected with entrepreneurs that we learn a lot from each other, right, you know, how do you deal with investors? How do you manage the teams, you know, what is the right decisions to make? So all of these surprising things, I was able to manage through a lot of these interactions and the support coming from people. And one very important thing Michael here is to be open for asking because, you know, if you don’t ask you will not you will not get anything. So, I would just say that we’ve been blessed by a lot of support from a lot of people across different organizations, and very happy that you know, we our our partnerships, like partners like MasterCard, and we also have been part of the SMU they’ve been part of the GMG. Excellent are so those are some of our powerful supporters sent you know, they made us they brought they supported us through our budget.
Michael Waitze 33:46
I cannot wait to see it. Shrikant Patil, the CEO and Managing Director of DigiAlly thank you so much for doing this. I really appreciate your time today.
Shrikant Patil 33:53
Thank you. My pleasure, Michael.