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How fintech can be a game changer for MSME lending and finance

The past few years have been a reminder of the existing credit gap in India’s MSMEs sector. As per IFC estimates in 2021, the total addressable credit gap in the MSME segment is Rs 25.8 trillion. Despite this huge demand, out of 63.3 million existing MSMEs across India, only around 15 per cent had access to credit from formal financial institutions, a dismal reality that can be changed with the easing of credit availability to the MSME Sector, particularly for the Micro enterprises.

As per a SIDBI-CIBIL Pulse report, the credit demand of MSMEs has increased by about 1.6x times the pre-Covid phase. The market potential of digital lending is estimated to be between $80 billion to $100 billion by 2023 for the MSME sector. In order to penetrate into the Indian MSME sector, the lending tech start-ups need to address the common industry pain points — long loan processing time, lack of transparency in the process, lengthy documentation and paperwork and high cost.


With this difficulty comes an opportunity for governments and the private sector to participate at multiple levels in an attempt to stimulate improved banking services, higher deposit rates, and increased capital accessibility for MSMEs. Fintech firms and technology have risen to the top of this field. Whereas banks, NBFCs, and even government schemes such as the ECGLS plan can only serve SMEs with proven creditworthiness, fintech has the potential to revolutionise lending for those at the bottom of the pyramid.


The Indian fintech industry has been led by digital payments. India created its first real-time payment system, IMPS, in 2010, and UPI in 2016. In the country, there are 375 payment start-ups. Over 50% of payment start-ups in India are in the form of mobile/digital wallets, gateways, and POS/mobile POS sub-segments. In India, internet transactions increased by 80% in 2020 compared to 2019. By 2023, India would account for 2.2% of the worldwide digital payments industry, with the total value of such transactions anticipated to reach $12.4 trillion by 2025.


The financial business is being fundamentally transformed by the increasing tide of technology. Digital payments, digital lending, banktech, insurtech, and regtech are some of the most important fintech areas. Fintech refers to a broad range of sectors and businesses, including banking, investment management, education, and retail.


In India, there are over 6 crore MSMEs, with over 95% of these units being micro firms. Almost 60% of MSMEs are located in rural regions, with 70% working in the service industry. They are distinguished by a lack of asset ownership, a lack of legal paperwork, and a cash-based business model. Furthermore, MSMEs encounter problems that are specific to certain regions, markets, products, and even cultures. As a result, a one-size-fits-all approach to finance is not a viable answer.


Given this context, fintech has the potential to revolutionise MSMEs lending and finance. For starters, it may make risk assessment and creditworthiness of MSMEs easier. The risk assessment methodology is now overly reliant on asset ownership, CIBIL ratings, documentation, and so on, which is incompatible with the informal character of MSMEs. Fintech can offer a cash-based financing strategy that evaluates an MSME’s creditworthiness based on its cash flows while harnessing the potential of digital payments.


Neobanks have recently joined the financial sector with the moniker “challenger banks” since they questioned traditional banks’ complicated infrastructure and customer onboarding procedure. Neobanks are financial firms that provide clients with a less expensive option to traditional banks. They take advantage of technology and artificial intelligence.


They use technology and artificial intelligence to provide individualised services to clients while keeping operational expenses to a minimum. In India, neobanks are attempting to build a name for themselves, despite the fact that the RBI has yet to sanction 100% digital lending.


Accounts aggregators (AAs) are another game-changing move in the fintech space. Account aggregator is a system that allows regulated institutions to share financial information in real-time and in a data-blind way (data flow through AA is encrypted) (banks and NBFCs). It allows data to flow between financial information providers (FIPs) and financial information users (FIUs) (FIUs). As a result, banks will have access to agreed data flows and validated data. This enables banks to provide lower ticket-size loans and more personalised goods and services by lowering transaction costs.


Second, fintech can provide last-mile connections and help to build a more inclusive financial system. With co-lending being a part of the financial ecosystem, bank-fintech collaborations will enable fintech firms to collaborate and harness their individual capabilities to deliver first- and last-mile services to MSMEs. An MSME borrower in the furthest reaches of the country may obtain funding thanks to the broad reach of banks and fintech-led NBFCs, as well as their digital competence and innovation. Co-lending agreements can assist them in obtaining loans since both conventional and digital lenders examine structured and unstructured data to assess risk, allowing MSMEs to receive loan approvals more quickly.


As innovation and technology advance, fintech will bring in additional models and actors in the credit arena, decreasing risk, reducing loan costs, making the system more inclusive and accessible to the MSME sector.

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