MSMEs: Why India needs a new fintech platform for MSMEs
A jarring bottleneck is the lack of consistent access to credit and liquidity, which disrupts the supply chain. MSMEs invest in raw materials and labor before production and then have to provide 30-60 days of credit to their customers: delayed payments from customers risk derailing execution for future orders.
According to an article in the Economic Times last year, “MSMEs in India account for 99 percent of all businesses, comprising 63 million MSMEs across industries and geographic locations.” The article further said that a survey conducted by Ernst & Young among 1,000 MSME entrepreneurs found that ’70 percent of them were adversely affected during Covid-19 due to reduced orders, loss of business, availability of raw materials and liquidity problems,’ essentially says . us why easier and credible sources of credit/financing are even more crucial for this sector.
Hence, the most pressing challenge is to democratize accounts receivable discounts in the Indian B2B ecosystem and create sustained liquidity and value throughout the supply chain.
The current need
The key question is how to innovate financial products based on various data points for MSMEs and other cogs in the production/supply chain and how to expand the scope of the financial products for them. Most lending by banks/NBFCs is based on collateral and it is on that front that MSMEs are suffering and lagging behind. How can we further innovate and drive access to credit for MSMEs? Can MSMEs be given loans based on data points like current assets (inventory/receivables) and GST payments?
The TReDS (Trade Receivables Discounting System) platforms have grown significantly over the past couple of years in the current landscape. However, they suffer from several problems that have limited their growth and limited their reach. The TReDS (Trade Receivables Discounting System) platforms have grown significantly over the past couple of years in the current landscape. However, they suffer from several problems that have limited their growth and limited their reach. These include not being a provider first platform, restrictions on the type of anchors that can be on board, limited incentives for anchors to use the platform and only allowing banks to finance.
In parallel, many new age companies in partnership with new age lenders/fintech have been able to gain traction in building effective transactional financing solutions for their ecosystems and have thus ensured capital availability for their stakeholders.
A new fintech platform is therefore needed to democratize transaction-based financing for all stakeholders.
The proposed model
In that spirit, the new platform must operate on some primary focus points – putting MSMEs first, increasing anchor coverage, funding from institutions and individuals, embedded finance using transaction data and recourse from anchors, and leveraging transaction data using GST e-invoicing.
To begin with, unlike most of the current platforms, the new platform should have transactions initiated by suppliers and primarily driven to serve their financing needs. It is also important to ensure that more industries and all sizes of companies fall under the programme, apart from only the large companies. Diluting the eligibility criteria for companies, to include medium-sized companies and also high-growth start-ups that may be loss-making but with strong balance sheets, will affect the penetration of this product, democratize it and thus the entire value chain.
In addition, the platform must be open to funding from all lending institutions (banks and NBFCs), other financial institutions (mutual funds, insurance companies, pension funds, etc.), Corporate Treasuries, including from the anchor company itself, and retail investors. The purpose should be to lower the threshold for companies and increased liquidity by adding more financiers will give access to more capital to the suppliers.
Furthermore, anchors can choose to provide detailed transaction-based information about suppliers, financial data about themselves and also a fixed recourse to make payment on due dates. Integrations with the government’s e-invoice portal can also provide access to almost real-time transaction data.
The platform should leverage the Account Aggregator framework to create a seamless onboarding experience for suppliers.
The fine writing
The proposed model would give the anchor the first right of refusal to finance the transaction using their corporate treasury. This is to motivate the anchor to participate in the transaction. We believe the lack of incentive for the anchor company has been a significant reason why other platforms have a limited increase. However, this scenario is limited to the liquidity available by the anchor/buyer’s treasury team and may therefore see extensive participation from lenders.
In the event, when the appellant/buyer cannot participate, participating lenders can finance the invoice by bidding on the invoice, making it transparent for the supplier to select the offer and receive payment against the transaction.
The whole point of the new platform with the features mentioned above is to increase usage across suppliers and buyers, thereby creating exponential value throughout the supply chain.
(Amrit Acharya and Srinath Ramakrushnan are co-founders of Zetwerk Manufacturing Businesses)
