By Saket Dalmia
Credit and finance for MSMEs: The past few years have been a reminder of the existing credit gap in India’s MSMEs sector. As per IFC estimates in 2021, the total addressable credit gap in the MSME segment is Rs 25.8 trillion. Despite this huge demand, out of 63.3 million existing MSMEs across India, only around 15 per cent had access to credit from formal financial institutions, a dismal reality that can be changed with the easing of credit availability to the MSME Sector, particularly for the Micro enterprises. As per a SIDBI-CIBIL Pulse report, the credit demand of MSMEs has increased by about 1.6x times the pre-Covid phase. The market potential of digital lending is estimated to be between $80 billion to $100 billion by 2023 for the MSME sector. In order to penetrate into the Indian MSME sector, the lending tech start-ups need to address the common industry pain points — long loan processing time, lack of transparency in the process, lengthy documentation and paperwork and high cost.
With this challenge, an opportunity arises for both policymakers and the private sector to intervene at various levels to try and encourage better banking services, higher deposit rates, and greater accessibility of capital for MSMEs. Fintech companies and technologies have taken the forefront in this area. Where banks, NBFCs and even government schemes like the ECGLS scheme are only able to cater to the SMEs having proven creditworthiness, fintech holds the potential to revolutionize lending even for the bottom of the pyramid.
Also read: 5 ways fintechs can help MSMEs solve their creditworthiness issues
Digital payments have been the flag bearer of the Indian fintech space. In 2010, India launched its first real-time payment system ‘IMPS’ and introduced UPI in 2016. There are 375 payment start-ups in the country. Mobile/digital wallets, gateways, and POS/ mobile POS sub-segments account for over 50 per cent of the payment start-ups in India. In 2020, online transactions grew by 80 per cent in India as compared to 2019. India will contribute 2.2 per cent to the world’s digital payments market by 2023, and the value of such transactions is expected to reach $12.4 trillion globally by 2025.
The rising wave of technology is completely changing the financial industry. Some of the most significant fintech sectors include digital payments, digital lending, banktech, insurtech, and regtech. The term fintech itself refers to a wide range of fields and industries, including banking, investment management, education, and retail.
There are more than 6 crore MSMEs in India, and over 95 per cent of these units are micro enterprises. Almost 60 per cent of MSMEs are based in rural areas and 70 per cent are engaged in the services sector. They are characterized by a lack of asset ownership, lack of formal documentation and are cash-based. Furthermore, MSMEs face challenges that are unique to geographies, markets, products and even local cultures. Therefore a one size fits all approach in terms of finance is not a feasible solution.
Also read: How fintechs are powering innovation in hinterlands for inclusive financial system for small businesses
Given this background, fintech can certainly be a game changer for MSMEs lending and finance. First, it can facilitate risk assessment and the measuring of the creditworthiness of MSMEs. Currently, the risk assessment framework is over-dependent on asset ownership, CIBIL scores, documentation, etc. which is incompatible with the informal nature of MSMEs. Fintech can provide a cash-based lending model that will assess the creditworthiness of an MSME based on its cash flows leveraging the power of digital payments.
In recent times neobanks have entered the financial system with the tag of ‘challenger banks’ because they challenged the complex infrastructure and client onboarding process of traditional banks. Neobanks are financial institutions that give customers a cheaper alternative to traditional banks. They leverage technology and artificial intelligence to offer personalized services to customers while minimizing operating costs. In India, neobanks are trying to make a mark although RBI is yet to allow 100 per cent digital lending.
Accounts aggregators (AAs) are also emerging as a game-changing move in the fintech arena. Account aggregator is a framework that facilitates sharing of financial information in a real-time and data-blind manner (data flow through AA is encrypted) between regulated entities (banks and NBFCs). It enables the flow of data between financial information providers (FIPs) and financial information users (FIUs). Thereby allowing banks to access consented data flows and verified data. This helps banks reduce transaction costs, which enables them to offer lower ticket-size loans, and more tailored products and services to their customers.
Second, fintech can deliver the last mile connectivity and create a more inclusive banking system. With co-lending now a part of the financial ecosystem, the bank-fintech partnerships will help fintech companies to collaborate and leverage their respective strengths to provide first and last-mile services to MSMEs. With the vast reach of banks and fintech-led NBFCs with their digital prowess and innovation, an MSME borrower can procure finance from the remotest corner of the country. Co-lending partnerships can help them get loans as both traditional and digital lenders analyze structured and unstructured data to assess risk and this helps MSMEs get faster loan approvals.
As innovation and technology progress, fintech will bring in multiple more models and players in the credit arena, thereby reducing the risk and cost of lending, thereby making the system more inclusive and accessible for the MSME sector.
Saket Dalmia is the President of PHD Chamber of Commerce and Industry. Views expressed are the author’s own.
The 2nd edition of FE Aspire’s SMExports Summit is here. Register now to book your seats!