View from India: MSMEs are bedrock of the economy

Fintech companies are changing the dynamics of the MSME lending outlook. This provides new opportunities for smaller businesses.

Micro, small and medium enterprises (MSMEs) are a key part of the Indian economy. “India is home to over six crore (60 million) MSMEs; 30 per cent of the GDP (gross domestic product) is attributed to them; 40 per cent of India’s exports come from the sector,” said Ashish Agarwal, director, Resurgent India Limited, speaking at Resurgent India’s virtual session, 'International Trade Finance – Opportunities for MSMEs'.  

These numbers are encouraging. MSMEs have generated millions of jobs. Yet, they haven’t been able to propel forward the way they should have. This could be attributed to the lack of steady and timely credit flow. Unable to show collateral, many MSMEs are compelled to function in an informal and less institutionalised manner. Hence, they are incapable of scaling up their production. All this is about to change.

Other than banks, newer financing models can be perceived as a means of addressing the credit gap. This is where non-banking financial services (NBFC) companies fit in. The fintech companies are powered by NBFCs. This new alternative lending platform tries to address many gaps in the system. Technology such as intelligent data is being leveraged to tailor lending models for MSMEs, depending on their size and requirement.

“Fintech plays a dual role in global trade finance, apart from disrupting it. On the one side it performs back-end operations by enabling banks to provide funding in a seamless manner,” explained Dhruv Bajaj, director, Enkash. Blockchain, the second aspect, helps in creating decentralised trust platforms. What it does is develop a trust-based channel for transactions. This could be understood as a framework for MSMEs to build upon. 

Coming to operations, on the frontal side, fintech helps take care of customers. Here, around 90 per cent of the process is digitised in terms of credit outlays and money transactions. At the back end, fintech companies act as the link between the MSME and the retail channel or vendors. Fintechs may also do cash negotiations with vendors. Another upward trend is crowdfunding, which is one of the outcomes of fintech services.

MSME data is being tapped to create proprietary digital loan models. These models have paved the way for e-commerce platforms to tie up with fintech companies. This area may well lead to a new dimension in the retail world. “E-commerce platforms could be a means for marketing and selling products. After all, the pandemic has encouraged e-commerce platforms to become a mainstream choice of purchase for metro and tier city dwellers,” noted Sankara Narayanan V, general manager, International Division, UCO Bank.

Digital infrastructure created by fintechs can build scalable transacting models for MSMEs. This can become the backbone for MSMEs to scout for international opportunities “MSMEs need to strengthen their position in exports. There’s a lot of potential in verticals such as electronics. Globally, India is the fourth-largest forex [foreign exchange] reserves holder,” reasoned Shams Tabrez, deputy general manager, State Bank of India.

The country could hopefully move a few notches forward in foreign exchange with support from the government. Last month, Nirmala Sitharaman, Union Finance Minister, announced a fund for boosting MSMEs’ presence in the export sector. Exim Bank and SIDBI have co-sponsored the fund, titled 'Ubharte Sitaare Fund' (USF). The scheme will identify and nurture companies with differentiated technology and products. With financial support and handholding, these MSMEs will be groomed to become globally competitive. Units with export potential will also be given financial support to proceed along export corridors. Though Uttar Pradesh has the highest number of MSMEs, USF will include promising companies across the country.

Since India has human capital, the quality and scale of production can be fine-tuned to meet global standards. “Around 80-90 per cent of the world trade relies on global trade finance. ASEAN (Association of Southeast Asian Nations) economies have a deficit of $692bn when it comes to global trade finance,” explained Agarwal.

India requires supportive monetary channels and procedures for ease of doing business. Digitisation will go a long way in enabling MSMEs to be globally competent.

What comes to mind is that a skilled workforce is required to take things forward. Technology can be used for scale, and scale helps in lowering costs. It would be nice if research institutes could open their doors for MSMEs to explore possibilities of using natural resources to innovate, so that their product lines can be differentiated from the regular ones.

MSMEs are the bedrock of the economy. “Large corporates are focusing on the supply chain ever since the pandemic struck India. Hence, they are more serious about mobilising funds for the supply chain, much more than before,” explained Ranadeep Mookerjee, product head, exports and trade block chain, trade products, ICICI Bank. Another pandemic-driven outcome is that organisations have in place a risk-management policy. 

Let’s hope the community of digital financial services companies will grow and, in turn, help MSMEs to grow by enabling them with working capital.

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