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How fintech startups are assisting MSMEs, the biggest contributors to the Indian economy

Abhay Bhutada
17th Nov 2017
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Other than the fancy startups and the established enterprises, the micro, small and medium enterprises (MSMEs) are one of the chief contributors to the Indian economy.

While contributing eight percent to the nation’s total GDP, micro, small and medium enterprises (MSMEs) also provide for 40 percent of the total export. Producing over 10,000 different types of products, these small-scale ventures are also responsible for 45 percent of the entire manufacturing output. Besides, the truest contribution of the MSMEs could not be comprised in these numbers.

Chasing their entrepreneurial aspirations despite lack of funding, digitalisation, or favourable conditions, the MSMEs are also responsible for creating ample amount of employment opportunities in the rural segment. Fuelling the dreams and aspirations of the non-urban youth, the MSMEs help check the urban migration, and the growth and development of the hinterlands of India.

MSMEs battling credit deficit worth $2 trillion

Despite their significant contribution to the Indian economy, the MSMEs have, for long, been neglected by the banks and the formal institutions of financing. Due to a combination of several factors, such as, lack of documentation, no collaterals and missing credit history, the sector does not cross the eligibility criteria. In addition, the requirement of small loan amounts further discourages banks and financial institutions from funding these ventures. The fact becomes further glaring when we consider the funding gap being endured by the sector. As per the report released by International Financial Corporation (IFC), small businesses in emerging markets, such as India, are facing a funding gap of $2 trillion.

However, a couple of radical changes being commissioned by the Government of India, along with the advent of fastidious, digitally empowered fintech platforms have been gradually rewriting the story of MSME lending.

Digital push following the demonetisation and GST

To begin with, last year’s demonetisation drive has propelled the digital onboarding of a number of MSMEs. While these small-scale enterprises have a long standing history of working offline and operating via cash, needless to say that the sector was one of the biggest casualties of the sudden scrapping of Rs 500 and 1,000 notes. When pushed against the wall due to cash crunches, these enterprises had no other choice but to adopt digital payments, in order to continue operations. Overnight, a number of these ventures also opened their bank accounts and, in an instant, became part of the formal banking chain.

This year, the application of Goods and Services Tax (GST) laid a strong impetus for continuing MSMEs’ foray into the digital world. Warranting digital compliance, GST is set to further increase the number of MSMEs that are digitally active. This is a welcomed change, especially when we consider the joint report released by Google and KPMG India, claiming more than 68 percent MSMEs to be operating offline.

Fintech: spelling the change for MSME lending

However, given a favourable environment and a slew of radical changes, there is still a huge credit deficit that is still unmet for the sector. This is exactly where the number of mushrooming fintech startups step in. To disrupt the status quo and level the playing field, a number of fintech lenders are supporting these small-scale ventures. The fact was made evident by McKinsey, claiming that nearly 75 percent of the emerging fintech lenders are helping MSMEs with lending, payment systems, retail banking, wealth management and more.

Bringing in a breath of fresh air, these platforms are disrupting the status quo by making the entire process digital, mobile-friendly and quick. Consequently, MSMEs enjoy higher eligibility while knocking at the doors of fintech lenders. In addition to ease-of-application processing and increased eligibility, MSMEs are also flocking to the fintech lenders for their fast, digital processes. Endeavouring to make the entire process hassle-free, some of the new-age fintech lenders provide MSMEs with loans within two working days.

While the MSMEs have been left starving for institutional financing over decades, the fintech platforms are here to transform the same. The market appears to be positively predisposed towards fintech lending. As per Nasscom, the fintech market is slated to be worth $2.4 billion by 2020, a double from the current value of $1.2 billion. Now, with the easy availability of business financing, the MSME sector is pegged for superior growth, and is emerging as a stronger, better contributor to the nation’s GDP, economic growth and overall development of the rural segments.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)

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