The importance of the MSME to the Indian economy can be outlined from the fact that apart from the agricultural sector, it provides the maximum self-employment, and employment opportunities. Small and medium businesses play a crucial role in the growth and development of the Indian economy with around 38 percent contribution to the country’s GDP. The sector provides a wide array of product and services across the expanse of the economy by producing traditional to advanced hi-tech items.
It needs to be noted here that though MSMEs are run by entrepreneurs with a vision to excel and will to succeed in their chosen field of business, they may necessarily not understand the complexities of financial markets and have easy access to credit. Hence, access to timely credit remains the biggest challenge of the MSME sector. Entrepreneurs especially small and medium size business units often complain of tedious loan procedures, complicated paperwork, long loan disbursal periods, need for collateral and high interest rates which make it uneconomical and a tardy task for MSMEs to raise capital from financial institutions.
However, new-age fintech firms are helping revamp existing lending practices and making it easier for MSMEs to access credit on easy repayment terms. These loans differ completely from traditional asset-backed loans in which the loan amount and the repayment tenure are determined by the collateral valuation. Fintech companies are evolving new lending models for MSMEs through the deployment of digital platforms which make it easy to apply for loans. Such platforms are emerging as fine examples of niche financial innovations and are getting ready to compete with traditional lending institutions like banks. A single-window client interface enables MSME loan borrowers to carry out electronic know-your-customer (KYC) authentication, get a suitable loan offer, state their acceptance and get the loan agreement signed through a mobile app, without submission of any paperwork. Such a lending model is highly beneficial for MSMEs given their high debt cost and lower return on capital.
With “Digital India” making waves around the country and a tech-savvy young generation jumping on the digital bandwagon, India is ready to make the transition to a paperless, technologically advanced online lending infrastructure. Fintech can prove to be the much-needed game-changer in changing the country’s lending ecosystem and should be extended across all sectors to boost their operational efficiency.
It was a welcome moment on November 2 when PM Narendra Modi announced a significant support and outreach program for the country’s Micro, Small and Medium Enterprises (MSME) sector to help strengthen their competencies. As part of the initiative to help MSMEs scale their operational curve, PM Modi announced 12 key initiatives, one of which is about obtaining in-principle sanction for loansuptoRs. 1 crore in just 59-minutes through a web portal ‘www.psbloansin59minutes.com’, a new benchmark in digital loan processing. The portal talks of 20 partner PSBs. Does that mean that a MSME can get an in-principle approval from upto 20 Banks, if compliant with law (GST returns, income tax, no defaults etc.). If it is true, the Balance of Power gets shifted from Banks to MSMEs as each bank competes to get these MSMEs which might have applied on the portal from the comforts of their homes, offices.
It is very encouraging to see institutions like SIDBI and a consortium of PSB Bankswhich have invested in such a fintech platform. India desperately needs adoption of many more such technology initiatives to enable MSMEs scale greater heights, and by corollary, make the country’s economy robust and stronger. So far such platforms have been only for retail/vehicle loans etc. and mainly used by NBFCs / Private Banks. This kind of technological intervention had generally eludedPublic Sector Banks and for MSME sector this appears to be first such intervention. This is a promising start on the part of PSBs to address the woes of MSMEs but actual delivery of credit would be the key.