By Arun Poojari
India’s economic engine is currently on an upward trajectory, with growth projections for FY 2024-25 exceeding expectations. Undoubtedly, a major driver of this success comes from MSMEs (Micro, Small, and Medium Enterprises), which contribute a hefty 30% to the country’s GDP. However, the sector continues to face several challenges in funding, financial literacy, and operational efficiency.
Unlike larger companies, MSMEs lack established credit histories, making it hard to secure loans. Even high interest rates further hinder their ability to invest in growth, upgrade technology, or expand operations. These issues underscore the ongoing need for targeted interventions to support them in overcoming financial obstacles and fostering sustainable growth.
The Reserve Bank of India (RBI), through its influence on the cost of borrowing, credit availability, and overall money supply, is a key player in fostering an environment conducive to MSME growth. For instance, their latest decision to maintain the repo rate at 6.5% in February 2024, coupled with stable inflation forecasts, aimed to stabilize borrowing costs, making financial planning easier for MSMEs.
This strategic move allows MSMEs to secure loans with more certainty, enabling better investment decisions and expansion. Moreover, controlled inflation can help the sector mitigate rising production expenses, potentially reducing raw materials and energy costs – thus easing the financial strain on MSMEs and improving access to short-term borrowing and working capital.
The RBI’s recent intervention for MSME lenders is a game-changer. They have mandated that all Regulated Entities (REs) provide borrowers with a ‘Key Fact Statement’ (KFS) for retail and MSME loans. This new requirement ensures that lenders disclose detailed loan terms, including the all-inclusive interest cost, in the KFS. Since the KFS earlier was only required for loans by commercial banks to individual borrowers, digital lending by RBI-regulated entities, and microfinance loans, this measure is expected to have a significant positive impact on the MSME sector, which faces challenges in accessing formal credit.
Today, out of 630 lakh MSMEs, only 250 lakh are within the formal credit ecosystem, and these guidelines are anticipated to stimulate more credit demand from MSME borrowers. By ensuring transparency and utilizing alternative data, regulated entities (REs) will be better equipped to extend credit to the priority sector, thereby enhancing financial inclusion within the ecosystem.
Streamlining the regulatory framework for MSMEs
The RBI has also unveiled major initiatives to enhance the financial ecosystem. First, the PRAVAAH portal simplifies online applications for regulatory approvals, making the process seamless for individuals and entities. Second, the RBI Retail Direct mobile application provides retail investors convenient access to the Retail Direct platform, facilitating easy transactions in government securities. Lastly, the fintech repository offers comprehensive information on the Indian fintech sector, aiding in regulatory understanding and policy development.
These initiatives are designed to streamline regulatory processes for MSMEs, thereby improving operational efficiency and reducing administrative burdens, in addition to broadening investment opportunities and potentially increasing financial returns by facilitating easier access to government securities. Through fostering collaboration between fintechs and regulated entities, the RBI aims to promote an environment where stakeholders can utilize insights from the repository to strengthen security practices and drive innovation.
Moreover, platforms like the Public Tech Platform for Frictionless Credit (PTPFC), piloted in 2023, facilitate easy access to small loans by connecting borrowers and lenders. Specifically targeted at MSMEs, this initiative promotes the disbursal of non-collateral-based loans. While monetary policy typically centres on managing the money supply and interest rates, the RBI’s engagement with PTPFC underscores its dedication to fostering financial inclusion and enhancing the efficiency of credit delivery systems.
In conclusion, there is an urgent need to promote alternative financing models and simplify loan application processes, particularly for MSMEs located in rural and semi-urban areas. The RBI has previously initiated digitization efforts such as TReDs and the Account Aggregator framework to facilitate frictionless credit. Fintech companies are crucial in this landscape, offering innovative digital solutions. These solutions encompass various digital tools, platforms, and applications that enable small businesses to access affordable and efficient financial services, streamline operations, and enhance competitiveness, even in smaller regions.
Today, a regulatory approach that strikes a balance is required, supporting fintech innovation while effectively addressing MSMEs’ challenges. Policy reforms should aim to harmonize regulations across different jurisdictions and foster collaboration in sharing successful innovations.
Arun Poojari is the Co-founder and CEO of Cashinvoice. Views expressed are personal. Reproducing this content without permission is prohibited.