In Indian economy, it wouldn’t be wrong to say that MSMEs (Micro Small and Medium Enterprises) are “Atra-Tatra-Sarvatra” (“Here-There-Everywhere”). For years, this sector has played a pivotal role in increasing employment, reducing poverty, creating entrepreneurial eco-system, thus creating a huge impact on the economic growth of the country. However, one can’t deny that it has done so in a constrained environment which has resulted in inefficient resource utilization. One of the main challenges for the MSME sector has been the lack of financial resources. Despite having such a significant role in country’s growth, why is it being ignored by financial institutions is a serious question that needs to be answered.
MSME’s contribution to our nation has been significant. Despite such significant contribution to the Indian economy, there is an ugly side to it as far as their funding needs are concerned, which can be brought out by the following points:
- 78% of the sector is either self-financed or funded via informal sector
- A gap of INR 20.9 trillion due to funding gap between formal and informal sources
- More than 11 million enterprises are striving to get adequate funding
Financial penetration in the MSME sector has been lower mainly because
- Strength and weakness of the segment are not evaluated properly
- Risk and opportunity are not linked to the prioritization by financial institutions
- Low financial awareness of the entrepreneur
- Traditional credit appraisal system used by the financial institutions
Moreover, the banks and financial institutions also face certain limitations that restrict them to fund MSMEs like:
- Limited information on the enterprises in the sector
- High cost of servicing
- Poor historic performance of the sector
- Limited understanding of sub-segment
In order to solve the above problems of low financial penetration from MSME and Banks’ side, Fintech (Financial Technology) Companies have come into the picture. These Fintech companies have started developing unprecedented products for the financial markets. They have found innovative ways to improve customer support, facilitate electronic payments, raise capital, Big Data analysis. Following are the leading areas of innovation that are changing the way of how finance was seen in past:
Fintech Companies have made an effort to reduce the traditional and long loan procedure of banks and financial institutions. Reducing the redundant manual procedure of banks is a must to save time and money of both fund seeker and fund provider and Fintech, using both traditional and alternative data sources to provide fully automated funding process, has done just that.
Data Analytics: Big data has allowed to better assess the MSME banking needs, repayment capacity and firms reliability with the help of an advanced algorithm. Many Fintech companies have started using the social media database for credit risk analysis. By doing so, credit assessment procedure has improved.
Value added services and support tools:
Financial planning, online support are some of the value added services provided by the Fintech companies to help MSMEs to develop and implement strong management practices. Financial institutions and MSMEs have started leveraging the power of the internet and using various support tools, have created an ideal funding environment.
Fintech has also grown its presence in providing market intelligence service, payments, P2P Lending, crowd-funding and value chain finance.
Thus, the challenges faced by MSME and the financial institution can become opportunities for Fintech to evolve. There is a saying “Necessity is the mother of invention” and the Fintech Companies are born out of necessity and have the potential to change the face of the country, provided it gets support and co-operation. Henceforth the 3 pillars i.e. MSME, Financial institutions and Fintech need to go hand in hand to increase the economic growth of our country.