By Kumar Shekhar
Ease of doing business for MSMEs: The Micro, Small, and Medium Enterprises (MSME) sector accounts for about 40 per cent of India’s total exports and contributes one-third of its GDP. With over 79 lakh MSMEs registered, the sector is in charge of employing about 12 crore people. It also allows the inclusion of marginal entrepreneurs who lack the basic information about the various digital frauds and Reserve Bank of India-mandated compliances, as well as women and other traditionally underrepresented entrepreneurs.
To fully benefit from digital finance solutions, the MSME sector needs to understand how important it is to comply with regulatory requirements like the need for full KYC. This will help them in conducting their online business without worrying about potential legal repercussions. Additionally, they must learn more about cyber security, the significance of adhering to compliance practices, its ramifications, advantages, and integration for the same if they are to scale up their businesses in this digitally transformed world.
Major challenges faced by the sector
As per RBI, online fraud cases totalled Rs 128 crore in FY22. MSMEs became a target of cyberattacks more frequently as a result of a lack of funding for comprehensive cybersecurity solutions. According to a recent report, small businesses are the target of more than 40 per cent of cyberattacks, which cause an average global loss of more than $188,000 per attack. Small businesses in India reported being victims of cyberattacks in some form 62 per cent of the time last year. These have resulted in losses that exceed Rs 3.5 crores.
One of the primary reasons for such financial fraud is not following KYC requirements when opening accounts and not following the regulatory guidelines established by the government. Over the years, RBI has increased pressure on banks, financial institutions, and fintechs for disregarding the rulebook in light of the rise in cybercrime incidents. As a result, several financial institutions have been assessed fines ranging from Rs 12.35 lakh to Rs 5.72 crore for their non-compliance.
Given that the identification of customers is the first step in each process, KYC is essential in today’s financial world as a weapon in the fight against online crimes and money laundering. By assessing and monitoring the risks, the KYC procedures are intended to assist in the prevention and detection of illegal activities or financing of terrorism.
Lack of capacity building
MSMEs have historically struggled with severe information asymmetry issues. For instance, they are prevented from utilising benefits provided by the government, banks, and other organisations because of the lack of information about various schemes. They frequently also lack the managerial, legal, and technical expertise and resources needed to perform their duties well.
Building the entrepreneurs’ capacity is a crucial prerequisite for the sector’s development because it provides them with the skills and resources they need to operate. The government has set up Enterprise Development Centers (EDCs) inside of District Industries Centers (DICs) in each district to address this issue. These organisations offer the hands-on assistance that is required in many areas, such as technical expertise, managerial ability, closing knowledge gaps, etc., having a multiplier effect. They can also help rural businesses with GST, IT, UAM registration, PAN applications, loan document preparation, and other issues.
Increasing growth and making formalisation possible
The MSME sector plays a crucial role in supply chains, innovation, and the creation of new jobs. Therefore, there is a need to encourage, support, and nurture innovative business ideas so that they can be turned into businesses. Additionally, the entrepreneurial spirit of the MSME ecosystem is not developing due to the small number of entrepreneurial development and incubation centres. The lack of formalisation and low levels of MSMEs’ registration in Udyog Aadhaar Memorandum limit the use of various schemes and credit support.
Additionally, all the stakeholders have found it difficult to develop targeted policies and put them into practice effectively in the areas of infrastructure development, formalisation, technology adoption, backward and forward linkage, credit gap reduction, and timely payments to MSMEs. Government interventions have a history of being largely supply-side focused and unable to effectively meet market demands.
Easing the acquisition of credit and risk capital
Because of their informal status, MSMEs are unable to access formal credit because banks find it difficult to assess their credit risk due to a lack of financial data, historical cash flow information, etc. Additionally, very few MSMEs can secure venture capital funding and equity support.
The importance of investing in a strong IT infrastructure has increased as more customers switch to digital platforms and companies use customer information and data more and more. Before now, the cost of deploying complex IT infrastructure was one of the biggest barriers for MSMEs. However, now it is simpler to implement essential and crucial IT security policies in the digitally connected world and with SaaS (Software-as-a-Service) to combat the rising cyber frauds.
Prepaid-based account/card fully compliant MSMEs have the benefit to have a maximum balance of Rs 2 lakhs. Banks and non-banks are allowed to issue pre-payment instruments (PPI) with a maximum balance limit of Rs 10,000 for a minimum KYC account. However, it is mandatory to complete full KYC within 24 months of the PPI’s issue date, otherwise, no additional credit is allowed. Ideally, it’s good to have a full KYC account from day one if infrastructure, cost allows; it will lead to a win-win situation for stakeholders including the institution, customer and ecosystem.
The use of technology should, however, be accompanied by all required security measures. MSMEs should be made aware of all compliances and programmes that are available to their advantage. Additionally, fintechs are gradually responding to the growing demand to onboard only fully compliant vendors and merchants. If the fintech sector adheres to it strictly, it will not only benefit them but also the MSME sector.
Kumar Shekhar is the Deputy Country Manager at Tide India. Views expressed are the author’s own.