By Shyam Govindan and Nilesh Jajoo
Credit and Finance for MSMEs: Global trade has recovered from the dip during the Covid-19 pandemic times but continues to face headwinds due to factors such as looming recessionary pressure, growing trend of protectionism and regionalism along with continued supply chain disruptions. Despite these emerging global dynamics, Indian exports have shown healthy growth and government initiatives aiming toward reduction in trade barriers, promotion of manufacturing, and building infrastructure have positioned India well for continued growth momentum.
At the center of India’s economic growth are Micro, small and medium enterprises (MSMEs) who contribute to around 40 per cent of India’s exports. Several initiatives have been undertaken to help MSME exporters to improve their market access, ease of doing business, and access to credit which has provided this sector with the required thrust. However, wider accessibility and adequate amount of financing remain to be an unaddressed challenge holding back the true potential of this segment to power the growth aspiration of India. The problems associated with financing the sector are well-known in terms of availability of documentation with relevant and accurate information, low financial literacy, etc. The solutions to address these problems lie in innovating the overall approach toward credit evaluation and monitoring of MSMEs.
Trade finance has been widely recognized as one of the critical solutions for driving MSME financing due to the inherent comfort of underlying transactions involved. Trade finance solutions include three broad categories: Open Account, Documentary trade and Supply chain finance (SCF). While documentary trade continues to play a significant role in trade financing, SCF is expected to play a critical role in addressing the MSME market due to the potential it carries to connect participants and mitigate the risk involved in the transaction across the value chain. Growth of Trade Receivables Discounting System (TReDs) platforms and recent changes to the factoring act along with innovations by new age companies in this space will augment SCF’s growth momentum.
However, to bridge the financing gap and drive widely inclusive growth, different participants in the trade finance ecosystem including financing and non-financing players will have to innovate while leveraging technology in their product proposition and business operations. This approach will not only increase market accessibility but also help in reducing the cost of transactions and improving the viability of penetrating the MSME segment. In our view, automation leveraging emerging technologies including intelligent character recognition, machine learning and artificial intelligence along with supporting enabling infrastructure has the potential to bring the required efficiency across participants to make the system more inclusive.
And, while it is extremely important for individual stakeholders to innovate, the long-term sustainability of the impact will be determined by the collaboration across ecosystem players to drive common goals given the multi-party nature of trade finance transactions. We believe that focusing on the following three areas has the potential to drive an integrated and interoperable approach to innovation:
- Building wider supply chain financing solutions to streamline cashflows across the supply chain covering multiple tiers and deepening the geographic coverage.
- Solving the roadblock for scaling the adoption of Distributed Ledger Technology (DLT) which is widely recognized as a solution to bringing efficiency across the system.
- Institutionalizing common standards and protocols by building on the global initiative on this front to enable interoperability across independent innovations.
Embedding sustainability in the trade finance ecosystem is another critical focus area that needs wider consultation to arrive at a standardized approach, measurement mechanism and product propositions. This area would go through evolution over the next few years and each of the ecosystem participants will have to prepare themselves for adapting to the change and engage in a continuous process of consultation, collaboration, and experimentation.
Technology has shown the potential of how trade finance can be made significantly more efficient, inclusive, and sustainable from its current form, the onus is now on all participants in the ecosystem to innovate, collaborate and build consensus to drive outcomes.
Shyam Govindan and Nilesh Jajoo are Partner, Consulting at Deloitte India. Views expressed are the authors’ own.