Tag: MSMEs

View: Can Budget 2022 make MSMEs more atmanirbhar

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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‘Make in India — Make for World’ is the mantra Prime Minister Narendra Modi gave in his 2020 independence day speech. For this vision to be successful, over 6.3 crore Micro, Small, and Medium Enterprises (MSMEs) must be taken on board. The third wave of the pandemic has heightened economic uncertainties and smaller enterprises face business threats that are destabilising their supply chains and even the mere existence of many. Encouraging an innovation-led ecosystem that incentivises technological interventions over the medium term could make small businesses atmanirbhar and help them make more for India and the World.

Budget 2022-23 comes at a challenging time yet again, as a fresh wave of Covid-19 threatens to stall a nascent recovery, especially among the critical micro, small, and medium enterprises (MSME). In addition to an urgent intervention to address the credit and liquidity challenges, budgetary allocation will have to provide for wider infrastructure and handholding support to the MSME sector. The upcoming budget should foster MSME policies to promote innovation and efficiency among smaller enterprises, driving higher domestic production and improving competitiveness for exports.

Initially at 200 percent, the Finance Act, 2016 provided for the phasing out of weighted deduction for research and development expenditure to 100 percent by 2021. However, evidence suggests MSMEs may have responded more to such measures compared to large firms. Reinstating a 200 percent weighted deduction for research and development expenditure for MSMEs can encourage innovation. Similarly, the reintroduction of the credit-linked capital subsidy scheme for technological up-gradation will encourage technology adoption among MSMEs.

In a rapidly changing technological landscape, MSMEs require support in filing and accessing patents and designing intellectual property rights (IPR). Budget announcements could include a) financial incentive equivalent to ten percent of the transaction value to MSMEs for selling patents and design IPRs to domestic entities, b) fund for subsidising the purchase of patent & IPR licenses (domestic or international), provided it is used exclusively for domestic production, and c) acceptance of patent and design IPRs as collateral by lending institutions. The Office of Controller General of Patents, Design & Trade Marks could issue a minimum valuation mechanism for these IPR. Such measures will not only encourage MSMEs to innovate but also to look at patents and design IPRs as marketable assets.

The budget could strengthen Make in India by providing support through policies that encourage domestic production and help MSMEs. The budget should allocate the much-awaited government corpus of Rs 10,000 crore to operationalise the MSME fund of funds for MSMEs announced under the Atmanirbhar Bharat scheme and push for Rs 40,000 crores from private equity/venture capital. The scheme would provide equity support along with helping MSMEs to get listed on the main board of stock exchanges.

Make in India echoes the support of production-linked incentives for MSMEs. The budget should consider expanding the PLI scheme to labor-intensive sectors, where MSMEs play a significant role. Leather and footwear manufacturing, furniture, natural textiles, and readymade garments, as well as toys, are some of the sectors where a PLI scheme will help domestic production and generate significant employment opportunities.

The rapid increase in input costs has impacted MSME production amid volatile supply issues. While reducing import duties on raw materials like steel could provide immediate support, indexing raw material prices in longer-term government procurement contracts could provide the necessary cushion against inflation and uncertainty in supply chains. To ease credit and liquidity concerns, the emergency credit line guarantee scheme (ECLGS) should be expanded further to ensure outreach among smaller enterprises within MSMEs.

The emerging markets have leaned on deficit financing to provide stimulus at a time when there was little activity and the pandemic was at its peak. Now, with the effects of the pandemic fading in developed economies and the realignment of global supply chains, this may be a unique opportunity to support consumption and production to restart a virtuous cycle of growth and investment.

The MSMEs need more support to improve production and exports to attain Atmanirbharta or self-reliance in line with the prime minister’s vision. The government, in the past, has shown an intent to strengthen the MSME sector, by substantially increasing budgetary allocations and introducing multiple reforms like ECLGS, subordinated debt, and revised definitions among others. Given the unusual circumstances due to the pandemic, and a never-before opportunity towards strengthening the sector as the economy opens up, the MSME sector has high expectations from the finance minister. It is now to be seen how much the government actions embody its own leader’s mantra.

—Alok Gupta is a senior fellow (non-resident) for the Wadhwani Chair in US-India Policy Studies at the Center for Strategic and International Studies (CSIS) at Washington DC. Alok is also the director of technology and policy at the Wadhwani Foundation in New Delhi.

Mayank K. Jha is a senior consultant for policy at the Wadhwani Foundation in India. Views expressed are personal

Read more from CNBC-TV18’s budget coverage here

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Budget 2022: GST parity, a key to empower India’s MSMEs

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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With the advent of digitisation, India witnessed the unlocking of new avenues of economic growth. The rise of fintech, e-commerce, edtech, SaaS and other new-age businesses over the last two years have provided further ammunition for us to be considered a digital powerhouse. But, if India wants to become a US$ 1 trillion digital economy by 2025, one of the major sectors that will immensely contribute to this goal is the country’s Micro, Small, and Medium Enterprises (MSMEs).

Characteristic of our country’s age-old entrepreneurial spirit, MSMEs account for 90 percent of all enterprises in the country. This excludes the nearly 15 million small family-run businesses like boutiques and mom-and-pop stores. Though MSMEs contribute about 30 percent towards India’s annual GDP and are widely acknowledged as the backbone of our economy, their role as a catalyst for socio-economic transformation has been underestimated and underserved.

It is a known fact that digitally-enabled MSMEs have the potential to grow twice as fast as their offline counterparts. Yet, despite the wave of digitisation that has swept the country and permeated our day-to-day lives, only around 10 percent of India’s small businesses sell online.

The current government has made deliberate efforts to encourage the development of MSMEs and promote ease of doing business. But, if the true economic potential of digitisation is to be realised, adopting a light-touch compliance regime will enable many more MSMEs to sell online.

To achieve this, the e-commerce industry expects the government to address some of the real and perceived compliance challenges around digitisation. Efforts need to be made to simplify the GST system, rationalise rates and harmonise GST thresholds between offline and online sellers.

As it stands, it is mandatory for online businesses to register under GST regardless of turnover. In the offline world, this only applies to businesses with a turnover of over Rs 40 lakhs. Based on market intelligence and secondary research, it is estimated that about five crore MSMEs are unable to sell online due to mandatory GST requirements.

To quote an example, in Q4 2021, over three lakh suppliers dropped out of the Meesho seller registration process at the GST stage. It is important to note that many small businesses are often run by one or two family members and often don’t have the manpower or liquidity buffer to carry out and pay for GST compliance requirements. The absence of digitisation has not just reduced earnings of MSMEs, it has also translated into reduced tax revenues for the Government.

Bringing MSMEs into the digital fold has the potential to push economic growth into higher gear. However, a singular focus on augmenting offline MSME businesses with online distribution by harmonising GST laws could be a game-changing economic transformation opportunity.

The government has acknowledged the importance of MSMEs to India’s $5 trillion ambition. The expectations from this budget is for the government to create equitable playing fields for MSMEs, irrespective of their channels of commerce. Harnessing the full potential of this sector’s innate, time-tested, proven entrepreneurial energy can propel our economy to even greater heights.

—The author, Vidit Aatrey is the founder and CEO of Meesho, an e-commerce platform. Views expressed are personal

Read more from CNBC-TV18’s special budget coverage

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Driving digital payments across MSMEs through UPI Interoperability

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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How do you pay for your groceries, electricity bill, or meals today? Perhaps, you used to withdraw cash to make payments before the pandemic. But now, you probably juggle with multiple UPI IDs every day, depending on which store you’re at. If so, you are not alone. UPI grew by 200 percent in the last five years and processed over four billion transactions in October ’21 alone.

The digital payment ecosystem in India is evolving, with stakeholders resolving individual use-cases to widen access to financial products and services. One such recent example is, paving the way for the Interoperability of UPI IDs using a unified 8 to 10 digit number.

The National Payment Corporation of India has issued the pilot for ‘Numeric UPI ID mapper’ to enable UPI numbers. In other words, every UPI user can generate a UPI Number – 8-10 numeric code digits – that can be used across all payment platforms. The pilot will likely strengthen India’s mobile payment user base and enable merchants to accept the digital payment ecosystem easily.

Ease-of-payments

UPI has been at the heart of India’s digital payment revolution, witnessing over four billion transactions in November alone. However, much of the digital payment revolution was consumer-centric, leaving merchants to deal with many challenges with e-payments.

One of the major pain points was maintaining individual UPI IDs on every mobile wallet. Despite signing up on dozens of mobile platforms, most merchants found it challenging to facilitate digital payments because they weren’t using the same app as their customers. That resulted in merchants losing a significant portion of their consumer base and eventually losing their confidence in digital payments.

The UPI Interoperability will enable millions of small business owners to offer easy, convenient, and instant payment options – all using a single UPI number. They also won’t need multiple QR codes to accept payments.

On the other hand, Users won’t have to remember different UPI IDs. They might as well use their phone numbers as a UPI number. This will allow existing users to adopt UPI as their primary payment method and open the door for new users who’ve been shying away from using digital payments because of minor inconveniences. Moreover, a single UPI number will allow small business merchants to streamline their payments digitally.

Streamlining last-mile digital payments

The success of the digital payment ecosystem depends on all the stakeholders involved. For merchants, it means simplifying operations and driving cost-efficient infrastructure to grow. However, most merchants spend a great deal of time gathering digital payments history under one umbrella – sometimes, they even lose track of a transaction. Hence, more often than not, merchants are unable to leverage the payment ecosystem in driving sales.

Millions of merchants will be able to streamline their operations by accepting payments from different apps on a unique UPI ID and further developing a sustainable relationship with their customers. The new payment innovations coupled with UPI Interoperability will also enable merchants to offer a range of bundled payment capabilities, including loyalty programs, low-cost EMIs, and much more.

The best part about the announcement is that it came when the Reserve Bank of India proposed UPI-based payment products for feature phone users. Along with UPI Interoperability, UPI-based payment products for feature phones can facilitate financial inclusion and bring people living at remote locations onboard.

Imagine the disruption that could happen if every mobile phone user – be it a smartphone or feature phone – starts using UPI as one of their payment methods to pay to millions of small merchants. It will revolutionize last-mile retail transactions and facilitate deeper penetration of digital payments across MSMEs.

Soon enough, the myriad of UPI IDs in and around us will turn redundant as convenience in the form of the user’s mobile number or any preferred number will reign over. This not only removes the hassle of juggling multiple IDs but will shape a brand new form for direct payments, disbursements, cashbacks and more powerful credit in the coming years.

It will also set an example for other developing and under-developed countries looking to revolutionize payment infrastructure. That day isn’t far when people in tier 2 and tier 3 cities will also use UPI as their preferred payment mode.

The author, Pratik Daudkhane, is Co-founder at Decentro

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

MSME credit guarantee scheme saved 13.5 lakh firms, 1.5 cr jobs: Report

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Emergency Credit Line Guarantee Scheme (ECLGS) launched by the government in 2020 to provide relief to MSMEs impacted by COVID-19 pandemic has saved 13.5 lakh firms from going bankrupt and consequently 1.5 crore jobs, claimed a report. The scheme is the biggest fiscal component of the Rs 20-lakh crore Aatmanirbhar Bharat Abhiyan package announced by Finance Minister Nirmala Sitharaman in May 2020, to mitigate the distress caused by the COVID-19-induced lockdown by providing credit to different sectors, especially MSMEs.

“We estimate almost 13.5 lakh micro, small and medium enterprises (MSMEs) accounts were saved due to ECLGS (including restructured). Almost 93.7 per cent of such accounts are in the micro and small category,” SBI Research said in a report. In absolute terms, the report claimed MSME loan accounts worth Rs 1.8 lakh crore were saved from slipping into NPA during the period and this is equivalent to 14 per cent of the outstanding MSME credit being saved from becoming NPA.

“As per our analysis, if these units had turned non-performing, then 1.5 crore workers would have become unemployed. In effect, the ECLGS saved the livelihood for 6 crore families (assuming four family members per worker including herself),” it said. Amongst the states, Gujarat has been the biggest beneficiary, followed by Maharashtra, Tamil Nadu and Uttar Pradesh, it said.

Under the scheme, 100 per cent guarantee coverage is being provided by the National Credit Guarantee Trustee Company (NCGTC) for additional funding of up to Rs 4.5 lakh crore to eligible MSMEs and interested Micro Units Development and Refinance Agency (MUDRA) borrowers in the form of a guaranteed emergency credit line (GECL) facility. For this purpose, a corpus of Rs 41,600 crore was set up by the government, spread over the current and next three financial years.

The report also suggested revamping of the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) for boosting credit flow to the sector. Interestingly, CGTMSE portfolio have more than 55 per cent recovery rate, low portfolio delinquency, low capital requirement but still an unpopular product, it said, adding, conversely, the non CGTMSE portfolio/ collateralised has a 25 per cent recovery rate, high portfolio delinquency implying much higher loan loss provisions with high capital requirement but still a popular portfolio.

“This could be done by enhancing the scope and role of the current CGTMSE portfolio by setting up an institution that will exclusively administer the CGTMSE along the lines of US Small Business Administration. Given that more than 90 per cent of the units are in the Micro sector, CGTMSE coverage may be made mandatory for all enterprises up to Rs 2 crore,” it said. Despite being in existence for two decades, the report said, coverage of CGTMSE for eligible loans remains abysmally low at sub-10 per cent mostly due to the complexities inherent in the product structure.

This may be due to various issues like higher premium outflows for guarantee obtention and continuance by borrowers, preference by customers to take recourse to asset backed loans to mitigate the high cost of guarantee, knowledge gap, it said.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

New age lending practices can support Indian MSMEs to shift into formal sector

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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MSMEs sit at the centre of India’s economic development, and recent data from the India Brand Equity Foundation corroborates this. India has approximately 6.3 crore MSMEs, contributing about 30 percent of India’s Gross Domestic Product (GDP) and employing over 11 crore Indians.

Despite these encouraging numbers, timely access to finance, as any small entrepreneur will tell you, remains a key constraint to the growth of micro and small businesses in India.

The World Bank estimates that the MSME credit gap in India stands at USD 380 billion. Similarly, another report by International Finance Corporation (IFC) also states Rs 25.8 trillion ($397 billion) as India’s MSME credit gap. 95% of the addressable credit demand comes from micro and small enterprises. Many MSMEs borrow from informal sources such as local money lenders for their cash requirements, at exorbitant rates of interest.

Family and friends continue to be the source of credit for an entrepreneur who lacks the necessary documentation or credit history to apply for a loan. According to the IFC report, formal credit supply addresses only Rs 10.9 trillion worth of MSME financing needs, which leaves an addressable credit gap of approximately Rs 25.8 trillion. Credit access can help MSMEs in the unorganized sector get absorbed in the formal economy, easily compete with global players, and gradually move into the organized, formal sector.

So, how can the new age lending practices bridge this gap and promote inclusion of MSMEs in the formal sector?

Cashflow based lending for MSMEs

When applying for a business loan with a financial institution or bank, lack of credit history acts as a major roadblock for an MSME. To enable credit access to MSMEs without a credit history, cash flow-based lending holds huge potential. This lending model makes it possible for MSMEs to borrow customised, short-term loans from financial institutions based on the business’ past and projected cash flow, including revenue and profit margins.

This model also helps lenders take into account any sectoral or economic risks that could impact the borrower’s business. Cashflow based lending can also work for MSMEs who do not have physical collateral to offer to the lender.

Analysis of MSME’s Bank Statements

Bank statement, which indicates the business’ financial health, can work as a powerful tool for loan sanctioning and approvals. A positive cash balance in the applicant’s bank account tells the lender that the borrower is ‘responsible’ with their finances. It further strengthens his repayment ability to the lender. Consistent revenue streams into the MSME borrower’s account could indicate profitability of business operations. A positive outlook in the bank statement, therefore, increases the MSME’s chances of securing a loan.

Collateral free lending for Financial Inclusion

Historically, lack of collateral had always been a stumbling block for small business owners when applying for loans. This is where digital lenders, especially those that offer unsecured loans, built their businesses on the opportunity to serve this under-served segment.

MSMEs can avail collateral free loans with flexible repayment options to meet their working capital requirements, expand their business, replenish stock, pay salaries to their staff, or to maintain the cash flow of their business. Unsecured loans enable new to credit MSMEs or MSMEs who were previously relying on informal channels, to be included in the formal credit system as applications for such loans need minimal documentation. The MSME only needs business documents such as GST, PAN details, to establish the authenticity of the business.

Building credit history of the MSME

We know that many small businesses or first-time entrepreneurs are unable to avail loans from banks or other formal channels as they lack credit history. Accessibility to debt and timely repayments result in an improvement in the credit scores of the borrowers. Taking a loan from a digital lender enables new-to-credit MSMEs to build a good credit history and thereafter access formal channels of lending based on the credit history thus created. Therefore, digital lenders not only offer speedy credit access to small businesses but also make them eligible for formal credit in the future.

In a survey conducted earlier this year, 55.2 percent of the interviewed  customers who had previous credit history showed improvement or consistency in credit bureau scores after availing loans.

Road Ahead for MSME Lending

Identifying the addressable gap and the business opportunity in MSME lending thereof, digital lenders are now putting special focus on loan products for MSME borrowers. This has enabled MSMEs to avail formal credit digitally, irrespective of where they are in the country. Digital Lending also supports faster decision-making due to automated credit underwriting methods and offers speedy disbursements via online modes.

In the last five years, new age lenders, and even existing traditional lenders, have leveraged cutting-edge technology to solve the pain points that customer face across the lending value chain. Policymakers too are increasingly pushing innovative lending models for MSMEs. Account Aggregator framework, for one, is a step in making lending more inclusive.

In the coming years, Open Credit Enablement Network will act as a disruptor in the MSME lending space. OCEN, which is a collective of Lenders, Loan Service Providers, Technology Service Providers, Account Aggregators and Underwriting modellers, will democratize access to formal & affordable credit. OCEN will make the digital ecosystem scalable, more integrated and enable the innovation of customised loan products for MSMEs. Small businesses will be able to access multiple loan products offered by different lenders on the Loan Service Provider’s platform. Akin to a marketplace for loan products, OCEN will make credit more accessible for India’s small businesses and foster their transition into the formal system.

The author, Arun Nayyar, is Chief Executive Officer at NeoGrowth. The views expressed are personal

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Nearly 50,000 MSMEs down shutters seeking reduction of raw material prices

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Around 50,000 Micro Small and Middle Enterprises (MSMEs) downed their shutters in the district on Monday to draw the attention of the authorities to the skyrocketing prices of raw materials used in various industries. The one day closure resulted in the production loss of around Rs 1,500 crore as the industries manufacture all types of spare parts for two-wheelers to six-wheelers, motor and pumps, defence and naval sectors, wet grinders, foundries and plastic industries, industry sources said.

The prices of raw materials have been increasing in the last one year, rising from 40 per cent to 70 per cent and some times 100 per cent, which was leading to loss of job orders for majority of the industries, even as 40 industrial associations extended support to the call given by All-India Council of Association of MSMEs for the nationwide stir, president of Tamil Nadu Association of Cottage and Tiny Enterprises J James said. Major industrial areas like Peelamedu, SIDCO, Kinathukaavu, Thudiyalur fell silent owing to the day-long strike.

Besides taking steps to bring prices under control, the Central government should form a committee to fix the rate of various raw materials, James said.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

IT minister asks bankers to create digital platform for easy credit to small businesses

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Union Information Technology Minister Ashwini Vaishnaw on Sunday urged the banking industry to create a digital platform on the lines of to provide quick and easy credit to MSMEs, small businessmen, and the like.

The building blocks required to create such a platform are already available, given the strong ecosystem of Aadhaar, mobile phones, UPI and digilocker, he said, asking the banking industry to come up with innovative ideas and solutions in three months.

Vaishnaw was speaking at ‘Digital payment Utsav’, part of a week-long showcase of India’s achievements in the digital space titled ‘Azadi ka Digital Mahotsav’, in New Delhi.

“Can we create a platform as powerful, seamless, good, as digital as UPI platform for providing very quick and easy credit to the MSME, small industries, small businessmen…people really at bottom of pyramid,” the minister asked the bankers in the audience.

The minister said he would be willing to look at promising concepts. “You have today a good ecosystem of Aadhaar, mobile phones, UPI platform, digilocker –practically everything you need to create this ecosystem,” Vaishnaw said.

Speaking to reporters on the sidelines of the event, the minister further said the idea is to ensure that easy credit at good terms, through a seamless process, can be made available to people at the bottom of pyramid, especially for micro and small industries, small businessmen, and street vendors, among others.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

How digital lending platforms are addressing credit needs of MSMEs using technology innovations?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Despite being one of the biggest job creators employing about 120 million individuals, and contributing around 35 percent of GDP, MSMEs in India struggle to secure funds.

This lack of financial backing further makes it difficult for them to meet their working capital needs, be it ensuring settlements to suppliers or making payments to staff. In the wake of this financial fragility, these businesses can’t plan for capacity expansion, even if they are performing well in the market. The pandemic has made the matter even worse by adding to the liquidity crisis.

This is where digital lending platforms step in. Not only have they made credit easily accessible to stressed businesses but have also transformed the overall financial ecosystem in the country.

Here’s looking at how these new-age lenders are addressing the credit needs of MSME businesses:

Replacing one size fits all with verticalized underwriting

Digital lenders leverage a verticalized underwriting approach, where they work closely with ecosystem partners like large aggregators to penetrate through segments and gain an in-depth understanding of a business in terms of cash flow cycles, need for funds, and much more. Indifi, for instance, works with tech aggregators like Zomato/Swiggy In F&B Industry or Amazon/Flipkart In ecommerce Industry to understand how businesses in their respective industry work, what challenges they face using relevant data and accordingly craft and offer solutions that best suit their needs.

Serving the underserved – Driving financial inclusion

In the absence of digital presence, credit history and owned properties, MSMEs have always faced difficulties in procuring credit. However, digital lenders, on the other hand, address this cash crunch by going through alternate data points like economic behaviour, payment history, and other past transactions and accurately predicting the borrower’s intent to repay. Thanks to technologies like AI, ML and data analytics. By leveraging these advancements, lenders provide underserved business owners with required funds backed by easy repayment options.

Increasing reach and enhanced customer experience

New-age technology solutions like E-Nach and E-sign enable lenders to perform activities like customer onboarding with minimal physical interaction. It means, businesses, irrespective of their location, can opt for loans from fintech players anytime and from anywhere.

With the latest technology integration, not only customer onboarding has become easier but loan disbursal has also become faster and frictionless. This gives fintech players the power to tap into the underserved segments and address their credit problems with tailor-made solutions. Moreover, these lenders have robust security infrastructure, which further helps in ensuring the highest safety levels to customers throughout their online journey. The combination of all these factors makes borrowing safe, seamless and accessible like never before!

Summing up

According to RBI, the credit demand by the MSME sector in India stands at $490 billion, of which $192 billion has been met by the formal sources. The remaining $330 billion clearly indicates the massive opportunity that digital lenders can bank on at the moment. With COVID-19 further accelerating the pace and scale of digital lending, we are likely to see more and more players joining the fintech bandwagon in the following years, and changing the way lending services are consumed forever.

The author, Alok Mittal, is Co-Founder and CEO at Indifi. The views expressed are personal

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

How fintech firms facilitate financial inclusion for MSMEs in India?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The role of MSMEs in promoting employment and entrepreneurial opportunities pan-India remains indubitable. The RBI Governor recently noted that MSMEs have become the growth engine of the economy, given their tremendous network of 63 million enterprises, contributing to around 30% of nominal GDP and 48% of exports.

But worldwide, MSMEs have been badly battered by the pandemic-related crisis. In India, however, MSMEs were already struggling during the past few years due to policy-related reforms such as the introduction of GST in July 2017 and Demonetisation in November 2016. As these disrupted business operations, liquidity issues plus lack of adequate and timely credit access hit MSME operations hard. For any business, big or small, credit is indispensable, without which normal operations are hampered.

Addressing Credit Barriers

Moreover, credit is imperative for economies to grow. Since the vast majority of MSME workers are semi-skilled or unskilled, adequate credit access helps MSMEs drive social and financial inclusion. But lack of access to funds has created a credit gap of approximately $240 billion for MSMEs.

Considering the wariness of legacy lenders to extend credit to MSMEs, especially due to their stressed condition during the pandemic, fintech companies are perceived favourably for serving MSMEs’ credit needs. The RBI Governor highlighted this, saying that as digital capabilities rise and connectivity becomes ubiquitous, technological innovations will swiftly and radically transform India’s economy. As a result, financial services will witness lesser information asymmetry, reduced credit risk and higher financial inclusion.

One way financial inclusion among MSMEs can be promoted is by nurturing a symbiotic equation between banks and digital NBFCs to create a winning proposition for all stakeholders. This is where the co-lending model facilitates the lending of credit by banks and registered NBFCs.

Significantly, both digital NBFCs or fintech companies and banks possess diverse strengths. By joining hands to leverage these strengths, fintech entities and banks could better serve MSMEs and other consumers. Through the co-lending model, a digital NBFC is allocated the task of sourcing loans. These are then jointly underwritten by both parties for disbursal in a 20:80 ratio, with a larger share held by banks.

In such a partnership, fintechs have robust last-mile connectivity, helping banks scale up without huge expenditure on physical branches. On the other hand, with their sound balance sheets, banks provide capital at costs that ensure credit remains affordable. Rather than being a zero-sum game for fintechs and banks, the symbiotic relationship serves both partners well. This offers MSMEs timely, affordable credit, aiding the agenda of speedy, sustainable economic growth as well as inclusive development.

Benefits of Co-lending

These advantages recently prompted the SBI chairman to state that his bank prefers the co-origination or co-lending model for handling MSMEs’ financial needs, instead of lending directly to them. The joint contribution of credit ascertains that the risks and rewards are also shared between both lenders while serving the unserved/underserved sections of the economy. This benefits banks because the fintech players possess the ability to process structured as well as unstructured financial data with a better understanding of the risk assessment. Thereafter, banks are more comfortable lending to MSMEs.

Some elaboration on the above benefits of collaboration in catering to MSMEs’ credit demand is in order. Aided by tech-enabled mechanisms and algorithms, fintech firms have a much lower customer acquisition cost. These are further reduced since they can partner with online marketplaces via their speed and agility. Conversely, banks typically run up higher acquisition costs since their branch-centric model primarily depends on physical presence, which requires higher operating expenses.

Besides, fintech companies facilitate greater customization of products with more flexibility as per borrowers’ needs from alternate data sourced through social media and deep tech integrations with digital partners. Additionally, their omni-channel presence and speedy processing times boost quicker customer acquisition. Borrowers can apply for loans through WhatsApp, Facebook or mobile apps from the safe confines of their home, securing approval within hours. What’s more, swift post-disbursal services and customer care are available through the convenience of digital.

Meanwhile, though digital lenders lack large cash reserves, partnerships with banks address this issue. The equation suits banks also as they cannot serve MSMEs efficiently due to traditional underwriting practices that prevent this. Lack of collateral is another major impediment preventing banks from lending to small businesses.

Yet, thanks to digital players and their prowess at undertaking due diligence of customers lacking proper credit history, MSMEs are being served in a cost-effective, speedy and inclusive manner. Thanks to the fintech firms, underbanked and unbanked segments of MSMEs are also benefitting. Buoyed by such partnerships, the objective of greater financial inclusion is likely to be realized in the coming years.

The author, Akash Anand, is Founder and Managing Director at DJT Corporation & Investments Pvt Ltd. The views expressed are personal

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow