India a favorable market for this collaboration
One in two out of five formal MSMEs in developing countries is either neglected or not served by banking firms, causing a total credit gap of nearly US$5 trillion, or 1.3 times the level of MSME lending in place. FinTech innovations have changed the financial landscape and how it operates, while flourishing in the space they have created over the past ten years, disrupting the traditional financial sector and improving the consumer experience.
Between 2011 and 2017, Global Findex estimates that 1.2 billion additional customers have access to formal financial services, many of them thanks to FinTech. A large part of this profit was made possible by fintech solutions, such as those provided by mobile money companies. People’s livelihoods and economic resilience increase when they are financially included, thanks to the FinTech and MSME Alliance.
This is crucial for minorities in particular, who have fewer chances and systemic obstacles than a powerfully wealthy part of society. Due to the huge increase in mobile penetration, digital credit and financing are the fastest growing options to close the credit gap. The rapid growth of digital credit has provided a wonderful opportunity to reach underserved people and MSMEs.
How did FinTech solutions and MSMEs enter the picture in India?
It started when the banking department started seeing an unusually high volume of calls and inquiries from customers around the country in November 2016. The sales force increased, making it difficult for the product team to keep up with the excessive demand. Many people were affected by demonetisation in different ways. Small and medium-sized business owners, however, endured the heat the most.
Due to the liquidation of Rs. 500 and Rs. 1000 notes and the shortage of smaller notes, a market heavily dependent on cash, they were forced to use digital payment systems to continue operations. Overnight, a significant number of entrepreneurs had to open bank accounts and join the official financial system.
Due to a number of reasons, including inability to provide identity documentation, lack of security, lack of credit history, etc., large banks and financial firms generally overlook the importance of Micro, Small and Medium Enterprises (MSMEs), which are vital to a nation’s economic structure.
FinTech companies made the decision to enter this significant industry and attack the problem head on. Not only are they bridging the gap between lenders and borrowers, but they have also developed new strategies to upend the status quo and create a win-win scenario. Establishing KYC information and pre-approval requirements for disbursement of loans can be their biggest advantage.
Current scenario and future prospects:
Banks have also begun to realize that FinTech firms are resources rather than competitors. To increase their own efficiency, they collaborate with fresh companies that offer original solutions. For example, by implementing CustomerXP’s AI software, ICICI is now able to develop customer profiles, predict customers’ future product purchases and analyze relationships with current customers, providing better data to the bank’s customer service department.
India is undoubtedly a desirable market for a FinTech and MSME collaboration. MSMEs generate about 8% of GDP, 40% of all exports and about 45% of manufacturing. Numerous partnerships like DBS Bank-CredAble, Kotak Mahindra Bank-Pine Labs, Federal Bank-CredAvenue, Axis Bank-Ezetap, IDBI-U GRO Capital, HDFC Bank-Paytm, SBM Bank (India)-Lendingkart, ICICI bank-Niyo and others have taken place recently and over the last five years or more, and most of them have focused on the digitization of credit payments to micro. According to World Bank estimates, India’s MSMEs have a credit gap of $380 billion, while statistics from the Reserve Bank of India show that MSMEs currently account for 10% of total bank credit overall.
Currently, 67% of traditional financial institutions are feeling the heat, and 84% of them are suffering from the disruption. Over the next three to five years, 95% of traditional financial institutions are expected to increase their fintech partnerships.
It is impossible to exaggerate the importance of MSME as a remarkable economic engine and a fundamental source of new business. Fintech can also reach a large market of untapped or underserved populations. Until now, India’s Tier-I and Tier-II urban centers have greatly benefited from this specific advantage of incorporation. Improving the overall market and dealing with problems such as lack of financial and computer literacy and burdensome administrative practices are of utmost importance.
In addition, a fintech association is solely responsible for being able to maintain relationships with SME customers despite failures. The problem of delayed payments in financing, especially in the MSME sector, is equivalent to having a risk that is unavoidable. But the secret is to look at the big picture, make sure relationships improve and stay strong.
In addition, there is a lot of interest from external investors in the Indian fintech sector as they want to take advantage of the country’s consistently growing GDP. Fintech and MSME are collaborating more and more as a result of initiatives like ‘Digital India’, ‘Make in India’, the ongoing demonetisation drive and the desire to make India a paperless economy.
The author is Managing Director, India Head, Foxhog. The views are personal.
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