Why digital lending is key for Indonesian banks seeking SME compliance ?

For years, the potentially lucrative small to medium size (MSME) sector in Indonesia has remained elusive for many Indonesian banks who have struggled to effectively lend to the segment.

With financial inclusion being the front and center of the country’s economic agenda, regulators have been pushing banks to expand their reach. The problem of the unbanked and credit-starved businesses has been so acute that Bank Indonesia intervened a few years ago, mandating all commercial banks allocate 20% of loans to the SME sector.

However, despite the regulation, compliance remains a huge uphill task for many banks as they rush to fulfill their obligation to increase loans to micro, small and medium enterprises (MSMEs). As of last year, only about 20% of all banks had met the regulatory minimum, according to the Financial Services Authority (OJK).

To help banks better capture the SME segment, technology is playing a huge role filling in the gap by transforming the processes required to efficiently lend to MSME customers. Inefficient processes and lack of data to assess the creditworthiness of micro and small enterprises has been one of the main challenges for banks.

Digital lending is helping banks speed up and accurately undertake credit-assessment using alternative sources of data that can make the loan approval process almost instantaneous.

The MSME opportunity

MSMEs remain Indonesia’s growth engine – there are almost 60 million MSMEs that together contribute over 60% of the country’s GDP.  Yet, only about 12% of MSMEs have access to formal credit which is estimated to cost the Indonesian economy nearly 14% of GDP.

According to OliverWyman, a management consulting firm, the MSME gap in financing will increase to $54 billion by 2020.

Despite the lending growth potential, MSME lending as a proportion of total lending fell from 20.8% from 2011 to 2017, according to KPMG. The underbanked regions of Sumatra and Kalimantan have a much higher growth potential for banks, KPMG noted in its 2017 report, “Finance in Indonesia: Set for a new path?”

According to the report, with the exception of Maybank, all ‘larger commercial banks’ reduced their MSME lending in part due to worsening credit quality.

The Digital imperative

Digitalising the lending process can help banks automate several aspects of the verification process, significantly cutting down the turnaround times for loan approvals. Alternative data sources help banks better assess the credit quality of an SME customer, an important consideration for Indonesian banks.

For example, Decimal Technologies’ platform helps banks conduct digital profile checks and automate approvals, reducing turnaround time and the chances of error. This not only helps them with several compliance requirements but also sets up the bank for future success by enhancing the customer experience.

Machine learning capabilities and advanced business analytics can further help financial institutions customise their approach for customers, integrating with necessary third party systems and credit assessment agencies, improving the risk management process.

According to consulting firm McKinsey, digital lending has been able to cut the time to lend from several weeks to as little as five minutes for many banks who have embraced going digital.


However, McKinsey warns that banks and financial institutions avoid a piecemeal approach as such a strategy has led to disappointing results for many banks and a loss of customer focus around the world, according to its research. It emphasises on the need for banks to take an end-to-end view of digitalisation without compromising on any aspect of customer experience.

Additionally, a scalable platform can help ensure the financial institutions remain future-ready.

To learn more about how Decimal Technologies’ end-to-end offering for digital lending can helps banks revolutionise their processes, write to online@decimal.co.in.

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