Micro, Small and Medium Enterprises (MSMEs) have long voiced their discontent concerning access to credit (traditional banking systems), and also about encountering rampant operational inefficiencies. According to a recent report titled, “Credit disrupted: Digital MSME lending in India,” by the Omidyar Network and Boston Consulting Group (BCG), MSMEs still find it cumbersome to access formal credit as nearly 40% of lending is taking place via informal sources; with total MSME credit demand estimated in the report being Rs. 45 lakh crore, Rs. 25 lakh crore are to be offered via formal (credit) channels (borrowing via proprietor name—Rs. 10 lakh crore—or via entity name—Rs. 15 lakh crore), Rs. 20 lakh crore are to be financed via informal (credit) channels (as reported by The Hindu Business Line).
This has made it vital to focus on ensuring deliverance of appropriate treatment to these traditionally (highly) vulnerable sects of society by allowing reasonably seamless access to formal credit. As a result, a number of steps and policies were initiated so as to include a considerable number of small businesses and underserved (and underprivileged) people under the auspices of the formal banking system. The issues hindering access to formal credit to MSMEs include: i. lack of collateral. ii. lack of formal credit rating. iii. loan values applied for also being minimal. Why inclusion is necessary even for MSMEs is because it inculcates a spirit of organised banking in the big departments of small businesses. This is where the application of financial technology (FinTech) has proved to be considerably inclusive for individuals and small businesses by making it possible for them to access conventional banking offerings.
Alternatively, this proves to be beneficial also for banks as the institutional enterprises can then tap on the underlying potential of (financially) serving the so far underserved clients in an entirely fresh market. As a result, these vulnerable sects get the opportunity to participate in the formal economy and receive primary financial services. So, with the banks working in tandem with the FinTech firms, transaction costs and turnaround times have minimised considerably owing to the shifting of operational services online in the digital ecosystem.
To fasten service delivery, guidelines on Aadhaar One Time Passwords (OTP), and e-Know Your Customer (e-KYC) are introduced by the government so as to also widen the market access. The core deterrent for MSMEs is lack of working capital; the potential solution for this bottleneck is offering payments through discounted invoices (in just a matter of days by financiers) via TReDS (Trade Receivables Discounting System). Similarly, India Post Payments Bank offers doorstep banking business to isolated regions of the country via a QR code and Aadhaar-based card and App solution. This service makes it possible for the MSME workers to eliminate the need to physically travel to their villages every weekend to contribute the saved money to their families.
The credit profile of these MSME clients is assessed by financial institutions (FIs) via Big Data Analytics by considering such credit risk determinants as payments and sales records, social media analytics, geographical location, and records data in local civic offices. FinTechs have reduced the operating cost of small businesses by speeding the processes of identity verification, documentation, and payments whilst also reducing the cost to do the same. These obligations, for e.g., on the part of the independent contractor include receiving payments, invoice generation, fulfilling timely GST compliances, and income tax returns’ filing. The advent of mobile-led lending marketplaces has opened new avenues also for the qualifying but underserved sect and the so far credit excluded businesses. The areas where FinTechs can play a crucial role is essentially in formalising digital loans’ access to MSMEs especially following demonetisation and GST (Goods and Services Tax), by offering tailored solutions to the sector with enhanced formalisation and digitalisation of the companies (businesses). The onus lies on FinTech companies to eliminate the delays arising from loan processing time, documentation, elevated interest rates, loan tenure, deficient loan sizes, and lacking transparency in timelines.
As far as policy initiatives directed towards augmenting credit access for the MSMEs is concerned, the government announced on 2nd November 2018 twelve key initiatives for supporting outreach initiatives for MSME sector. This also included the launch of the 59-minute loan portal to facilitate streamlined access to credit for MSMEs (granting of loans equal to a maximum of Rs. 1 crore with in-principle approval via this portal, in less than 59 minutes). Also announced was a 2% interest subvention for GST registered MSMEs on new and incremental loans. The Reserve Bank of India (RBI) also formally announced the “Interest Subvention Scheme for MSMEs” in its notification dated February 21, 2019. The third announcement pertaining to credit access by the Prime Minister was concerning the companies having a turnover of over Rs. 500 crore. Following the announcement, these companies are now mandatorily required to register under the Trade Receivables e-Discounting System (TReDS—as also mentioned earlier in the article). This is meant to facilitate access to credit from banks by entrepreneurs depending on their impending receivables, so as to keep their cash cycle running.