MSMEs are the backbone of the Indian Economy, contributing 29.7% of the nation’s GDP. The Honourable Prime Minister’s vision is to increase its MSMEs contribution to Indian GDP by 50%. A jump from 30% to 50% requires an optimized industry equipped with everything needed to maximize its potential. For the Indian economy, the benefits of the MSME sector are multifold. From employment generation to poverty elimination, the functions of MSMEs are endless.
Even so, the Indian MSMEs are lacking to achieve the greater heights that the nation’s leader seeks to achieve. Reasons are the lack of financial Instruments, financial backwardness, and the recent outbreak of the Covid-19 pandemic. At present, low levels of technology and financial crunches are the two biggest deterrents for the Indian MSME sector. A recent yet effective solution to the twin problem is bringing a FinTech revolution. So, let us understand why MSMEs require Fintech solutions to flourish in 2022
How the Fintech Sector is a Solution for MSMEs in India?
While the Government and MSMEs are initiating necessary reforms, fintech as a possible solution for the twin problem is often neglected. For the MSME sector, fintech can be a boon providing effective solutions for various functions of MSMEs. The inclination of Fintech solutions in Indian MSMEs will open a wide window of opportunities for Indian Entrepreneurs and start-ups. Fintech is a vast service that may help to achieve wonderful heights and push the Indian economy to another level.
From an idea to the setup of a unit, MSMEs and SMEs require huge monetary support. Repeatedly, Indian banks and the NBFC network have proved to be incapable to satisfy the financial needs of MSMEs. While NBFCs are already reeling under liquidity crunches and bankruptcies, banks tend to show conservative behavior while lending to SMEs. In such a scenario, the fintech sector seems to be a promising alternative to the twin issue.
In recent years, many SME lending Fintech Indian companies have come up. These start-ups provide digital lending to serve the growing SME industry in the country. It is a proven fact that by improving financial literacy levels and providing financial technology, MSMEs can generate exceptional profits.
The Fintech Revolution in India
As a new sector, fintech witnessed an adoption rate of a whopping 87% in India during the past decade. The adoption rate is significantly higher than the global average rate of 64%. From the launching of India’s first ATM in 1987 to becoming the fastest-growing fintech market globally, leaving behind China, a recommendable enthusiasm within our entrepreneurs and start-ups is visible. The demonetisation in 2017 further added to the digital currency revolution. Due to demonetisation and Digital India mission, multiple digital payment platforms like Google pay, Paytm, PhonePe, Amazon Pay, etc. have come up.
The best out of all such initiatives was the introduction of UPI, “Unified Payment Interface”. National Payment Corporation of India introduced UPI to bring a revolution in digital payments and bring India closer to its objective of a “Cashless Economy”. From International transactions to the payment of a Pani-Puri vendor, every second payment is digital nowadays.
The evolution of Fintech in India has also cherished the lending market for MSMEs in India. Just like the United States and the United Kingdom, India is aggressively switching towards alternatives for SME lending. While we were locked inside our homes during the pandemic, the SME lending fintech market in India achieved $300 billion worth.
What are the prospects of the MSME Lending and Fintech Sector?
For the MSME sector, the fintech revolution is like a cherry on the cake. In addition to the usage of digital business transactions, fintech provides a modern technology-based system to lend funds to MSMEs. These funds help MSMEs in managing working capital, procuring machinery, expanding and acquisition of businesses, and creating employment. Fintech lending is a massive opportunity for the MSMEs sector. Especially for SMEs, it represents a viable alternative to the traditional lending system via banks or moneylenders.
By analyzing the various phases during which the MSME sector requires monetary assistance, fintech lending plays a catalyst role to resolve the credit availability issues. From wallets to lending to insurance, SMEs lending by the fintech sector has redefined how transactions in a business are carried out. Such rising trends have positioned India as an attractive market worldwide. By introducing of various lending channels such as the point of sale based lending, invoice-based lending, P2P lending, crowdfunding, and short-term lending; the fintech sector reduced the documentation and numerous visits to banks for the sake of monetary funds. Via fintech lending options, MSMEs also get exposure to the offers like fast and convenient online applications, favourable interest rates, innovative finance products, and flexible payment options.
The Government of India along with institutions like SEBI and RBI are aggressively prompting the Indian economy to become a cashless digital economy and to emerge as a strong fintech sector. This fintech sector aims to benefit MSMEs by making it easier to access financial products, financial transactions, and stimulating financial inclusion. As MSMEs shift from 20th-century products to 21st-century fintech solutions, this will also have a multiplier effect, due to their linkage with employment, inclusion, exports and wealth distribution. Around 51% of MSMEs hail from rural parts of India, adoption of fintech solutions by such small scale industries will also bring digital and financial literacy to rural India. Needless to say, this will ultimately result in fulfilling the aim of Digital India as well.
A perfect example would be Australia where the banks dominated around 80% of the lending market. As a result, the small sector industries were crippling with financial crunches, most on the verge of shutting down. Fintech comes up as a helping hand by providing a secure solution to the financial outbreaks within the SMEs in Australia.
Are Fintech solutions safe?
In the era of Industrial Revolution 4.0, machines and technological solutions have become the ultimate savior almost in every sector. The amalgamation of finance and technology called ‘fintech’ has provided a safe ecosystem during the COVID-19 outbreaks. In order to remain safe and with no face-to-face contact; digital transactions, buying financial products, and investment in digital currency had surpassed all the earlier records. According to the data released by Forbes, around 68% of people are willing to use Financial Technology.
As we come back to full circle, Indian Fintech start-ups and entrepreneurs can reshape the financial services of MSMEs, by reducing the costs & providing quality financial services. The key to boosting fintech adoption is to merge the functions of MSMEs with the fintech solutions. The Fintech Sector seeks to develop unique and innovative models of assessing & minimizing risks. In comparison to the ecclesiastical banks, Fintech start-ups are less homogenous. Therefore, these start-ups offer greater diversity and great learning opportunities to improve capabilities and culture. Amid the harsh economic breakdown due to the pandemic, Deloitte predicts that an economic recovery will run parallel with the new opportunities in fintech.
But yet, there have not been any exact notions on how safe fintech solutions are. It is just a technological solution to the financial systems, and threats like data privacy, digital heist, cyber security threats, etc., may outbreak such platforms. But is this not the case with every technological platform? While fintech as a solution should be explored, awareness of cybersecurity should also go hand in hand, especially for small-scale industry owners.
What is the role of the Indian Government in promoting fintech for start-ups?
The regulators such as RBI, SEBI, SIDBI, are playing an outstanding role in strengthening the Indian MSMEs. A continuous impetus is being provided by various policies, packages, exemptions, and relaxations for the start-up sector. The outbreak of the COVID-19 pandemic certainly broke the financial backbone of MSMEs. To minimize its repercussions, the Indian government, along with the World Bank, raised $500 to revitalize the MSME sector.
With the vision to build a world-class financial technology sector in India, the government of India in its union budget 2021 came up with another commendable initiative. It was the setting up of a Fintech hub in GIFT City (Gujarat International Finance Tec). It will create around 150,000 jobs and will act as a catalyst in the use of artificial intelligence and machine learning. Along with it, INR 15 billion had also been allocated to support and boost digital payments. This is the most required support at the moment; around 40 percent lack access to formal sources of finance.
Other monetary reliefs announced by the Indian Government are Rs. 3 lakh crore collateral-free automatic loans for businesses and funds worth Rs. 10,000 crore for the ‘Emergency Guarantee Credit Line’ facility for the MSME borrowers.
Along with all these policies to strengthen fintech and MSMEs in India, it is pre-required to enlighten the entrepreneurs about the fintech revolution. Knowledge on financial literacy and financial technology will help them flourish their business with fintech solutions for MSMEs.
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