Tailored solutions, faster access: How fintech infra can democratise financial services for MSMEs

Micro, small, and medium enterprises (MSMEs) drive job creation and economic growth in India, contributing nearly 30% to the GDP. A better ecosystem for MSMEs hence ensures better development for the economy.

Despite a 19.2% increase in bank lending to MSMEs, these enterprises still need help accessing financial services. Traditional financial institutions impose significant limitations on MSMEs, including lengthy application processes, rigid eligibility criteria, and a need for tailored solutions. These constraints result in limited access to credit, hindering business growth and restricting innovation.

While traditional banks have made strides in MSME lending through innovative models such as co-lending, non-banking financial companies (NBFCs) have emerged as unexpected key players. The NBFCs have realised that MSMEs have unique requirements. Therefore, by adopting a flexible and personalised approach to providing finance, they give a much larger upper hand to MSMEs with varying finance needs—unlike the commercial banks' generic models.

This focus on customisation complements the transformation driven by fintech infrastructure.

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The evolution and impact of digital lending in boosting credit for MSMEs

By building a robust fintech infrastructure, MSMEs can access a broader range of financial products and services designed to meet their specific needs:

• Streamlined access: Fintech platforms leverage technology to simplify the application process. Online applications, minimal paperwork, and faster turnaround times empower MSMEs to access the funds they need quickly and efficiently.

• Data-driven decisions: Fintechs go beyond traditional credit scores. Fintech companies can create a more holistic picture of an MSME's financial health by analysing alternative data sources like sales history, ecommerce transactions, and cash flow. This enables fairer and more inclusive credit assessments, ensuring deserving businesses aren't excluded.

• Tailored solutions: MSMEs have diverse financial needs. Fintech infrastructure empowers the creation of a wider range of financial products specifically catering to MSMEs. This includes smaller loan sizes, flexible repayment options, and specialised services like invoice financing and supply chain finance.

• Levelling the playing field: Fintech can create equitable opportunities for MSMEs, especially in rural areas, by bridging the gap between formal financial institutions and underserved segments. Leveraging mobile technology and digital platforms, fintech companies can access geographically dispersed MSMEs, enabling them to participate more fully in the formal economy.

The benefits extend far beyond just access to capital. Fintech infrastructure offers a suite of tools that can revolutionise how MSMEs manage their finances:

• Automation of financial processes: MSMEs can save time and money by properly automating financial tasks. This includes invoicing, collecting payments and matching them to the correct invoices for easy reconciliation.

• Digital payments: Reduces reliance on cash, simplifies transactions, and improves cash flow management.

• Use of alternative data: By analysing transaction history and digital footprints, fintech companies can enhance credit assessment processes, providing a more comprehensive and accurate evaluation of creditworthiness.

• Compliance automation: Tools for automated reporting and transaction monitoring reduce the burden of regulatory compliance.

• Leveraging data: MSMEs can make more informed decisions on financial planning, budgeting, and resource allocation for business growth and sustainability by using data through advanced analytics and forecasting tools.

Democratising financial services for MSMEs unlocks a wave of positive economic consequences. MSMEs are the largest job creators in the country, driving employment and economic growth. Facilitating their success can lead to increased innovation, enhanced productivity, and greater economic stability. This support can also stimulate local economies, reduce poverty, and foster more equitable development nationwide.

Increased access to capital fuels business growth, leading to more jobs, innovation, and overall economic prosperity. Furthermore, financial inclusion fosters a more equitable and stable financial system.

While multiple obstacles in data security, regulatory frameworks, and digital literacy gaps need to be addressed, the potential of fintech infrastructure is undeniable. By working together, governments, financial institutions, and fintech companies can create an ecosystem that empowers MSMEs to thrive.

In conclusion, fintech infrastructure offers a powerful tool to dismantle the barriers that have traditionally excluded MSMEs from essential financial services. By providing faster access to capital, tailored solutions, and a suite of financial management tools, fintechs can empower MSMEs to unlock their full potential and drive economic growth for all.