By Rahul Raj
Credit and finance for MSMEs: Small and medium businesses (SMBs), with their contribution of over 30 per cent to the GDP, are the backbone of the Indian economy. With India on its course to becoming the third largest economy worldwide, SMBs have a crucial role to play in their progress. While this segment should logically be the focus of the traditional banking sector, they remain underserved because they are perceived as “high risk”. To address the gap, neobanks have risen to service the needs of SMBs, by dispelling the “one size fits all” notion. Since the pandemic’s beginning, these digitally enabled financial entities are leveraging state-of-the-art technology to provide customised, cutting-edge solutions that are helping them tide over operational challenges that have thus far hampered growth.
For SMBs to progress and catapult India into a position of global economic power, it is evident that neobanks have to play a larger role as enablers. The question is, what are the actionables for greater adoption of neobanks by SMBs? Let us take a closer look.
To understand what needs to be done for greater adoption of neobanks, let us first understand why SMBs have typically been underserved by traditional banks and the solutions that neobanks offer:
Lack of customised services
- SMBs have typically been considered ineligible for traditional capital for the lack of documentation, incomplete tax returns and limited collateral.
- Neobanks are using technology to carve out integrated solutions equipped to provide services from invoice generation to tax filing.
- These enable small enterprises to avail of cash-flow-based loans
High cost of acquisition
- Lower-rung MSMEs tend to be a lower priority for traditional banks, as they have a high cost of acquisition
- By digital onboarding, neobanks can onboard even in remote locations
- Neobanks are also reaching out to individual tie-ups that work best for SMBs
High service costs
- Low digitisation of SMBs makes servicing costs higher for traditional banks as document collection and other related services get cumbersome
- Neobanks on the other hand are reaching out with smart partnerships and a number of channels and leveraging alternate data to optimise resources and bring smart solutions for SMBs
A recent study revealed that the average loss suffered by SMBs depending on legacy banking systems was ₹ 67 lakhs per enterprise, and till date, about 56 per cent suffered from wastage of time from repetitive tasks. As a result, many SMBs continue to face obstructions in their business processes.
To overcome these challenges, many neobanks are constructing tailormade service portfolios for SMBs with a host of financial services. These range from creating digitally enabled platforms for small businesses to offering payment, taxation and booking services and even synergising with other apps for offline facilities.
How neobanks operate currently
For now, neobanks are concentrating on providing the best customer experiences as they cannot service them as full-fledged banks and financial institutions. Partnerships with traditional banks are thus on the rise, and form a core of their operations to reach out to a wider number of SMBs.
In their current capabilities, neobanks offerings are not directly regulated by any one regulator, but by virtue of their partnerships, they fall under the purview of the RBI, SEBI and IRDA. The assurance that they are regulated though indirectly, has enhanced their credibility and has played an important role in ensuring the reach of their products to SMBs that in turn has helped the masses.
Regulatory push required
For the sector to mature and for more SMBs to adopt neobanking solutions, it is critical that Indian regulators may consider regulating the space like their global counterparts. Assessing their impact and evolution in the Indian financial ecosystem, it is critical that indirect regulations are re-examined in light of the digital offerings they make in relation to other financial entities.
The regulators may want to consider creating an unambiguous framework relevant to the new digital capabilities that neobanks have displayed over the past two years.
Lessons from neighbouring countries
Given the potential of the sector and the important role it can play in enhancing the GDP of the nation, it is evident that neobanks need to be vested with greater powers, akin to traditional financial institutions. When it comes to granting niche licenses to these financial entities, the RBI may want to craft regulations for neobanks in a similar manner as that payment banks or small finance banks in the past.
The regulators may consider taking a leaf from other Asian countries that have modified licensing regulations to include neobanks under the regulatory framework. The Monetary Authority of Singapore (MAS), Hong Kong Monetary Authority (HKMA) are some regulators that have enabled neobanks in the past.
Since 2019, MAS has issued digital banking guidelines that allow Digital Full Banks (DFBs) to provide a full range of financial services and even take deposits from retail customers. It has also granted licenses to digital wholesale banks (DWBs) that are focussed on servicing SMEs. Similarly, HKMA issued virtual bank guidelines in 2018 that enable technology-led virtual banks to provide services through e-channels rather than physical branches.
There is no doubt about the fact that neobanks have both the technological prowess and innovative capabilities to enhance the financial capabilities of India and spur SMBs for greater adoption. By building niche and cost-effective solutions, neobanks have established credibility. By greater regulatory push and partnerships with the Government, they can play a wider role to establish their efficacy and reach out to more SMBs with customised solutions.
Rahul Raj is the Founder & CEO of FloBiz. Views expressed are the author’s own.