How fintech has the potential to revolutionize the work of MSMEs

The ever-expanding Indian entrepreneurial landscape is a force to be reckoned with. But now is not the time to invite complacency. At this point, it is important to look at areas of high growth and ensure that efforts are made to further increase their growth. One such inalienable cog in the great Indian machinery is the MSME sector.

MSME lay at the heart of the Indian dream. Despite their smaller scale of operations, the MSME sector contributes 27% to the national GDP, they also provide employment opportunities to a massive part of the population. It is through the operations carried out by these relatively small organizations that the backbone of the Indian economy is formed. In order to harness and further strengthen the significant potential of MSMEs, we need to improve their ability to access financial solutions and fintech has the power to reach deep into India to target this huge segment.

Despite low NPA the interest rates on micro and small loans make up a discouragingly small part of MSMEs’ credit exposure. A major reason for the reluctance of traditional banks is the perceived lack of data at their disposal to assess the borrower’s creditworthiness. Furthermore, MSMEs often find themselves complaining about the lack of working capital to meet their meetings. The inability to raise sufficient funds to sustain operations on a daily basis can be disastrous for any organization.

Another major obstacle hindering MSMEs is the significant delay they have to endure in payments. To put the matter in perspective, the amount stuck as delayed payments is estimated to be around 10 lakh crore. But where there are difficulties, there is room for innovation.

It is this innovation that is best represented by the fintech industry. Throughout its nascent stages, the premise behind the fintech movement was to facilitate financial inclusion for the traditionally underserved areas of the market. In line with this spirit, the fintech industry has come up with solutions specifically aimed at the MSME sector.

The biggest mechanism to address the lack of data for MSMEs was the introduction of account aggregators. Account Aggregators are RBI licensed entities that allow users to register their consent to share their data between various stakeholders. Through the use of AAs, banks can access all the data about the borrower necessary to check their credibility, thereby offering an antidote to their reservations.

Furthermore, several institutions have started offering unsecured loans especially for MSMEs. Since MSMEs lack assets or any other form of collateral to offer against loans, unsecured loans can allow them to access credit without undue anxiety. Moreover, access to real-time data via Account Aggregators enables institutions and fintechs to guarantee the cash flows of MSMEs.

To help MSMEs with their working capital needs, an innovative solution is Invoice Financing. Through this process, a company can sell its invoices to gain access to cash immediately. Invoice financing can enable MSMEs to maintain their operations without any hassles. In addition, using data, fintech can not only guarantee invoices for customers, but also do deep-tier financing for tier 2 and 3 suppliers.

While a delay in payments can be particularly annoying for an MSME, the introduction of UPI has largely relieved them of their worries. Through UPI, a supplier can receive the payment and confirmation immediately. The best part is that there are no rebates attached to the technology, so suppliers can receive their payments in full. This can also enable them to build their financial history for access to newer products.

While fintech has been a significant boon for MSMEs in several respects, perhaps no impact has been as great as that seen in insurance. Traditionally, MSMEs have not witnessed high insurance penetration rates. This was one of the main reasons why the loss witnessed by MSMEs during the pandemic was unmatched by any other factor.

But with fintech, the entire insurance industry has gone through a major upheaval. As most insurance fintech companies operate digitally, they can offer their products without incurring the same high costs as their peers. This greatly reduced the cost of insurance products.

Furthermore, through the use of AI and ML, personalized guidelines can be offered to potential consumers to entice them. These two have largely increased the use of insurance products across the country, especially in the MSME sector.

All in all, while traditional, archaic banking processes shackled the MSME sector, fintech has emerged as a brilliant key to its confinements. Should this drive to bring about financial inclusion continue, MSMEs will be among the prime beneficiaries and it is important for them to be specifically catered for as they represent the promise of a faster growth rate for the entire country.

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