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Micro, small, and medium-sized enterprises (MSMEs) have played a strategic role in the economic development of India over the past five decades. MSMEs are the backbone of the country’s economic structure as they foster entrepreneurship and provide substantial employment opportunities. They have helped the Indian economy withstand global economic meltdowns and aftershocks.
As per the MSME Annual Report 2021-22, 51% of MSMEs are in the rural sector, and the remaining 49% are in the urban regions, employing over 11 crore people. The sector has thus contributed immensely to the industrialization of rural areas at lower capital costs. MSMEs have helped reduce regional imbalances, resulting in better equitable national income and wealth distribution. The MSME sector in India has a vast network of 63 million enterprises that contribute around 30% of GDP and 48% of exports. The growth of MSMEs is thus complementary to large industries, contributing significantly to India’s inclusive industrial development. For MSMEs to continue driving the Indian economy, adequate financial inclusion measures for the sector must be implemented. Liquidity issues and lack of proper Credit facilities continue to haunt this sector impacting their operations. For instance, policies like demonetization in 2016 and GST implementation in 2017 caused hardships for the industry. Likewise, the COVID-19 pandemic severely disrupted the functioning of the sector.
For MSMEs, the traditional sources of borrowing have been bank loans, non-banking financial institution (NBFC) loans, and Micro-Finance institutions. Most MSME employees are semi- skilled or unskilled, so having adequate Credit Facilities and SME Lending options will help increase MSMEs with social and financial inclusion. Owing to the operational issues faced by MSMEs, especially during the pandemic, have been Lending restrictions from conventional lenders.
For building an efficient credit system that supports Financial Inclusion, there is a need to adopt and implement technology and innovation to aid India’s economic growth. The Government of India is promoting the move into a cashless economy by providing seamless digital payment services to people. The Ministry of Micro, Small, and Medium Enterprises (M/o MSME) is also a partner in this initiative. For all MSMEs registered under Udyog Aadhaar Memorandum (UAM), the Ministry has made efforts to spread awareness about the ease and use of various digital payment systems in India like UPI, BHIM, and BharatQR code. Up to December 2021, digital transactions for the MSME sector were at 98.53 % (value) and 87.32 % (number) for 2021-22.
Though this is an encouraging move, according to the IFC-Intellecap 2019 report, the MSME sector is still financially underserved, with a credit gap of approximately $240 billion. As per the IFC report, 85% of MSMEs are still not accessible to credit. Fintech companies can provide the much-needed impetus to these MSMEs to meet this credit gap. There is a need to develop a sustainable collaboration between banks and registered NBFCs to promote the financial inclusion of MSMEs. This co-lending model could create a winning proposition and provide value to all concerned parties.
Similarly, the Banks-Fintech Partnership could help leverage the various strengths of both sectors, aiding better service propositions to the MSME sector. This model would initiate the digital NBFCs or Fintech to source loans. These loans would then be jointly underwritten for disbursal in the ratio of 20:80 by both parties, the larger share held by banks. Banks bring trust and money. Shopkeepers trust banks with their money and, therefore, the current account relationship. FinTechs can bring agile technology to the table to help fulfill the bank's credit needs.
Fintech companies can help the MSME sector by offering more flexibility and customized SME lending or microfinancing options. Also, the omnichannel strategy adopted by Fintech companies and tie-ups with digital partners could help faster processing time and loan approvals. Borrowing can now be quickly undertaken via mobile apps etc.
As digital lenders do not have large cash reserves, the Banks-Fintech Partnership will solve this issue. Banks also stand to gain as they have been unable to efficiently lend to the MSME sector owing to stringent underwriting norms and the lack of collateral from small businesses. For instance, aided by technology-based algorithms, Fintech companies conduct due diligence on customers with poor credit histories at a much lower customer acquisition cost. Conversely, banks would have incurred higher acquisition costs through their brand-centric model, where most financial risks are concentrated in banks. Thus, the co-lending model could provide the needed credit boost to the MSMEs.
The MSME sector is integral to the development of the economy of the country. However, the sector faces operational issues restricting lending, with 85% of MSMEs being underserved in terms of credit. With the robust growth of digital payments infrastructure in India, efficient SME Lending can help bridge the credit gap. Through the Banks-Fintech Partnership model, the vision of financial inclusion for the MSME sector can thus be undertaken in a cost-effective, quick, and inclusive way. These financial inclusion initiatives would also primarily benefit small businesses across MSMEs, mainly those without access to traditional lending modes. Micro, small, and medium-sized enterprises (MSMEs) have played a strategic role in the economic development of India over the past five decades. MSMEs are the backbone of the country’s economic structure as they foster entrepreneurship and provide substantial employment opportunities. They have helped the Indian economy withstand global economic meltdowns and aftershocks.
As per the MSME Annual Report 2021-22, 51% of MSMEs are in the rural sector, and the remaining 49% are in the urban regions, employing over 11 crore people. The sector has thus contributed immensely to the industrialization of rural areas at lower capital costs. MSMEs have helped reduce regional imbalances, resulting in better equitable national income and wealth distribution. The MSME sector in India has a vast network of 63 million enterprises that contribute around 30% of GDP and 48% of exports. The growth of MSMEs is thus complementary to large industries, contributing significantly to India’s inclusive industrial development. For MSMEs to continue driving the Indian economy, adequate financial inclusion measures for the sector must be implemented. Liquidity issues and lack of proper Credit facilities continue to haunt this sector impacting their operations. For instance, policies like demonetization in 2016 and GST implementation in 2017 caused hardships to the industry. Likewise, the COVID-19 pandemic severely disrupted the functioning of the sector. For MSMEs, the traditional sources of borrowing have been bank loans, non-banking financial institution (NBFC) loans, and Micro-Finance institutions. Most MSME employees are semi- skilled or unskilled, so having adequate Credit Facilities and SME Lending options will help increase MSMEs with social and financial inclusion. Owing to the operational issues faced by MSMEs, especially during the pandemic, there have been Lending restrictions from conventional lenders. For building an efficient credit system that supports Financial Inclusion, there is a need to adopt and implement technology and innovation to aid India’s economic growth. The Government of India is promoting the move into a cashless economy by providing seamless digital payment services to people. The Ministry of Micro, Small, and Medium Enterprises (M/o MSME) is also a partner in this initiative. For all MSMEs registered under Udyog Aadhaar Memorandum (UAM), the Ministry has made efforts to spread awareness about the ease and use of various digital payment systems in India like UPI, BHIM, and BharatQR code. Up to December 2021, digital transactions for the MSME sector were at 98.53 % (value) and 87.32 % (number) for 2021-22.
Though this is an encouraging move, according to the IFC-Intellecap 2019 report, the MSME sector is still financially underserved, with a credit gap of approximately $240 billion. As per the IFC report, 85% of MSMEs are still not accessible to credit. Fintech companies can provide the much-needed impetus to these MSMEs to meet this credit gap. There is a need to develop a sustainable collaboration between banks and registered NBFCs to promote the financial inclusion of MSMEs. This co-lending model could create a winning proposition and provide value to all concerned parties. Similarly, the Banks-Fintech Partnership could help leverage the various strengths of both sectors, aiding better service propositions to the MSME sector. This model would initiate the digital NBFCs or Fintech to source loans. These loans would then be jointly underwritten for disbursal in the ratio of 20:80 by both parties, the larger share held by banks. Banks bring trust and money. Shopkeepers trust banks with their money and, therefore, the current account relationship. FinTechs can bring agile technology to the table to help fulfill the bank's credit needs.
Fintech companies can help the MSME sector by offering more flexibility and customized SME lending or microfinancing options. Also, the omnichannel strategy adopted by Fintech companies and tie-ups with digital partners could help faster processing time and loan approvals. Borrowing can now be quickly undertaken via mobile apps etc.
As digital lenders do not have large cash reserves, the Banks-Fintech Partnership will solve this issue. Banks also stand to gain as they have been unable to efficiently lend to the MSME sector owing to stringent underwriting norms and the lack of collateral from small businesses. For instance, aided by technology-based algorithms, Fintech companies conduct due diligence on customers with poor credit histories at a much lower customer acquisition cost. Conversely, banks would have incurred higher acquisition costs through their brand-centric model, where most financial risks are concentrated in banks. Thus, the co-lending model could provide the needed credit boost to the MSMEs.
The MSME sector is integral to the development of the economy of the country. However, the sector faces operational issues restricting lending, with 85% of MSMEs being underserved in terms of credit. With the robust growth of digital payments infrastructure in India, efficient SME Lending can help bridge the credit gap. Through the Banks-Fintech Partnership model, the vision of financial inclusion for the MSME sector can thus be undertaken in a cost-effective, quick, and inclusive way. These financial inclusion initiatives would also primarily benefit small businesses across MSMEs, mainly those without access to traditional lending modes.
The MSME sector is integral to the development of the economy of the country. Thanks to the robust growth of digital platforms in India today, SME Lending can become a reality. Through the Banks-Fintech Partnership model, the vision of financial inclusion for the MSME sector can thus be undertaken in a cost-effective, quick, and inclusive way. These financial inclusion initiatives would also primarily benefit small businesses across MSMEs, mainly those without access to traditional lending modes.
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