The fourth largest growing economy of the world, with an expected GDP growth rate of 7.4% in 2017 and 7.8% in 2018 (according to ADB Outlook 2017) and a projected size of $5 Trillion by 2025, (according to Morgan Stanley), the Indian economy is thriving and as vibrant as ever. Its demographic advantage, strong government policy actions and a push towards digitization of the economy, have placed the country on the global list of high potential growth markets.
Contributing largely to this growth, are the Small and Medium Sized Enterprises (SMEs) who play a role in creating jobs, fostering innovation and entrepreneurship and contributing to a large chunk of the GDP. An enterprise is categorized as Micro, Small and Medium if its initial investment in plant and machinery does not exceed INR 2.5 million (US$ 50,000) for a micro, INR 50 million (US$ 1 million) for a small and INR 100 million (US$ 2 million) for medium enterprise. While in the last few years, the Government has given impetus to the sector through the JAM schemes (Jan Dhan, Aadhar and Mobile), the sector still faces challenges in day to day operations and scaling up due to lack of adequate finance. According to a report by International Finance Corporation (IFC), the total financing gap in the SME space is INR 2.93 trillion, a considerable gap that’s attributed to high cost of credit for small loans, high risk perception and regulations that make it difficult for banks to fund small enterprises on the supply side. Demand side challenges include legal structures of SMEs, lack of collateral and high cost of hiring the necessary skills and resources required for sophisticated fundraising.
While many NBFCs and private banks have gone a step further to create specialized products to help SMEs tide over their working capital requirements, the real impetus to the sector is coming from new-age and innovative FinTechs that are leveraging technology to bridge the funding gap to SMEs and provide swift, easy and simple credit solutions. These New-on-the-Block FinTechs leverage innovative technologies to provide cutting-edge products and services directly to end users, more often through mobile and online channels, cutting out the lethargy and processes of more traditional companies.
With their very disruptive nature FinTechs are nimble on their feet with solutions designed to suit the low scale requirements of SMEs, which is why they are relatively more efficient and cost-effective and small and medium businesses are certain to gain from the disruptive powers of FinTech. These FinTech companies offer customized solutions, fitting to the needs of smaller businesses. These tailored solutions include peer-to-peer lending, merchant and e-commerce finance, invoice finance, online supply chain finance and online trade finance. Another advantage FinTechs have is their effective use of Big Data, available in public domain, to lower the cost of credit risk assessment of SMEs. This data is what most Fin-tech companies thrive on and analyze along with lenders to offer funding to MSMEs. A fitting example of this trend is the JAM (Jhandhan, Adhar and Mobile) architecture, which is already evolving to offer access to a wide variety of data sources for authorized parties. This use of technology not only mitigates the need of primary research conducted by credit officers, but will also prove to be more cost effective in assessing small businesses.
Data analytics, apart from providing access to data, also gives insights that enhances decision making and improved decisions reduce credit costs. Treading on these line-of-thoughts, the FinTech approach to SME lending is mostly inclined towards harnessing the clout of supply chain consolidation in various industries. The Fin-tech segment is of the opinion that this approach provides leverage on both origination and underwriting. Systematic use of business data for credit evaluation is now becoming a viable option, owing to the increasing automation and availability of electronic data. This methodology not only brings in the benefits of credit to a wider range of SMEs, but also empowers them to further contribute to the growth of the country’s economy. With their massive potential to catapult the MSME sector to new highs, FinTech also brings with it, a plethora of opportunities for national governments, development financial institutions, entrepreneurs and investors to not only lend their support but also benefit from the trend. While it will be difficult to state how fast the segment is growing, the potential of Fin-tech as a growth enabler is hard to negate.
Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of the publication