The Indian economy which is known for its vibrancy and the ‘emerging market’ status, the role played by micro, small and medium enterprises (MSMEs) is vital because of the substantial contribution they make towards the nation’s growth — also known as the GDP or Gross Domestic Product. It is quite evident in the official statistics of employment and exports.

The latest data speaks volumes of the impact of the MSME sector. It generated over 5.87 lakhs jobs in 2019. With a substantial share of 48.10 per cent of the total amount of exports, the labour-intensive sector contributes a whopping 29.7 per cent to the nation’s total GDP.

The sector indicates the health of the Indian economy. Prime Minister Narendra Modi’s vision of ‘Atmanirbhar Bharat’ can be achieved if an adequate thrust is given to this sector. But the sector faces perennial problem relating to inadequate financing, and in the uncertain times such as the pandemic, the financing needs become more acute.

Today most financial processes have become automated as financial products from loans to investments are being offered online. The government under the MSME outreach plan in 2018 launched PSB 59-minute loans to small businesses but didn’t find many takers due to the lack of awareness. In 2019, the scheme was reviewed to make it more effective. In light of this development, it becomes prudent to understand the power of fintech and how it works for the sector.

The advent of fintech in MSME sector

There is enough thrust from the government as it aims to increase the sector’s GDP contribution to 50 per cent from the current 29 percent with the country striving to achieve the ambitious $5-trillion target for its economy.

Among all the requisite steps taken to support the sector, it is the lending ecosystem that needs a booster dose. India saw the advent of the digital payment system in the wake of demonetisation drive which banned Rs 500 and Rs 1,000 currency notes in 2016. It is during that time financial technology gained attention that led to the Unified Payment Interface (UPI), and since then, companies operating in the lending sector have started creating products to back up the infrastructure.

Moreover, the emergence of Reliance Jio as a major telecom player in 2016 further lent support to fintech aiding the MSME sector. The internet subscriber base has witnessed a rise from 391 million in 2016 to 604 million in 2018, and the increased penetration of the Internet opened up the door for Indian MSME sector as well.

Why MSMEs should embrace fintech solutions?

The MSME sector after facing the challenges in the demonetization phase, has become conscious of the technology and opened up to fintech developments including mobile point of sale machines, digital wallets, accounting software, fintech SaaS and others.

In fact, inclination towards fintech among Indian MSMEs has opened up a gamut of opportunities for startups operating in the domain. However, MSMEs need improved access to high-quality data available from multiple sources that are credible.

Most importantly, access to credit remains a critical area for MSMEs. The lending in the MSME sector remains mostly confined to informal financial entities such as money lenders. However, the potential of digital lending in the sector is estimated to touch $80 to $100 billion by 2023.

Fintech has become an integral part of the modern-day businesses including MSMEs who are rapidly expanding and thus offering a massive opportunity for fintech solutions provider. There are several pain points that need to be addressed to make the process of lending easier and faster. Some of the problems include the duration of loan processing, lack of transparency in the process, insufficient loan size, and inflexible loan tenures.

If you go by the report by International Financial Corporation (IFC), there is still a funding deficit of more than two trillion dollars for small businesses despite the government’s efforts to offer credit to the MSME sector. In this scenario, fintech companies have entered the game offering a mutually beneficial relationship with MSMEs.

Around 75 per cent of fintech enterprises have offered support in areas of retail banking, loans, invoicing, and wealth management. Such companies come to the rescue of small businesses which aims at the quick disbursal of funds. Besides, they are willing to carry the risks linked to lending in this sector.

Three critical services offered by fintech 

Data Analytics: One of the most important aspects of fintech solution is data analytics. There are solutions which help to assess the creditworthiness of a business or evaluate collateral available for loan. At present, enterprise-based solution in fintech is aided with the analytical software that includes solutions such as PayU, Paytm among others. The adoption of these solutions in MSME sectors hints at the increasing demand for advanced analytical tools that are expected to grow in the near future.

Mobile Technology: It has emerged as the most adopted solution to initiate transactions and receive payments or submit loan applications.

Artificial intelligence: Artificial intelligence or AI has emerged as an efficient tool, making application processes smoother and faster. In some cases, it even helps to customise products to suit consumer needs.

Impact of fintech solutions

With the awareness around fintech solutions for MSMEs coupled with higher penetration of Internet in India and the proliferation of smartphones, the MSME sector has started looking at fintech for various reasons. The Goods and Services Tax Network (GSTN) has a registered base of more than 9.2 million MSMEs who are filing monthly returns now. The GSTN data gets verified under the matching concept which helps to fetch the information around the business and helps in complementing the conventional financial data.

The impact of digitalization on the MSME sector has led to operational improvements ranging from increased profitability, operational efficiency apart from higher customer engagement. Companies in the fintech space have turned into a single window supporting the financial needs such as instant short-term loans, low interest rates, simplified processes, and low transacting cost. The introduction of GST helped MSMEs to reach out to fintech startups offering tax-filing solutions. Besides fintech-based SaaS products are also sought after by MSMEs in view of the increased limit of tax exemption and flat tax rates.

Most traditional institutions in the finance sector have realised the need to embrace fintech with the lending space witnessing growing alliance between traditional companies and fintech solution providers.

More MSMEs are expected to adopt business analytics tools given that 47 per cent of MSMEs have incorporated digital tools for business processes, payments, and online sales in India according to research BCG. With the continuous evolving lending market in India, the government’s vision to achieve the desired growth target for the MSME segment does not seem far from reality.