Financial Technology and the Inclusion of Indian Businesses
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India is a land of over 1.3 billion people and multi-billion dollar entrepreneurial ideas. However, until recently, the country was perceived to be a challenging ground for small businesses due to widespread operational inefficiencies. Financial inclusion has been an important topic not just for the people, but also for institutions at the helm of the country. This has led to multiple initiatives and policies to bring not only people under the banked category but a maximum number of businesses as well.
Financial inclusion broadens the resource base of the system as a whole by promoting a culture of organised banking among large segments of small businesses. Importantly, this helps to mitigate the exploitation of traditionally more vulnerable sections of society by facilitating easy access to formal credit. According to the International Finance Corporation, globally more than 200 million Micro, Small and Medium Enterprises (MSMEs) in developing countries find it hard to access traditional banking systems. MSMEs in India alone, provide more than 60 million jobs. However, a majority of MSMEs do not find access to formal credit due to issues like lack of collateral, lack of formal credit rating, and small ticket size of loans.
Things Have Changed
In recent years, the financial inclusion gap has started to be bridged through the application of Financial Technologies which have helped both individuals and small businesses access traditional banking facilities. While the transformational power of these financial technologies have many dimensions and clearly benefit millions of people and small businesses in every corner of the country, large institutional enterprises such as banks also benefit from whole new markets and clients they were previously unable to access. By opening interaction between systems, financial technologies have enabled these people to be a part of the formal economy and avail several basic financial services which were almost impossible to obtain a few years ago. Banks are partnering with new FinTech firms and are taking processes online, thereby reducing transaction costs and turnaround times. There has also been a renewed approach to look at alternate lending solutions for businesses to become more inclusive.
A Few Examples
The Government has itself issued guidelines on Aadhaar One Time Passwords (OTP) and electronic Know Your Customer (eKYC) to facilitate account creation procedures with the aim of increasing access and opening up the markets. Furthermore, initiatives like small banks focusing on providing financial services to the unbanked have also become a priority.
This transformation is all the easier to understand with real-life case studies:
Shamsher owns a small food processing unit in Punjab. Due to some short term supply chain issues, his business fell short of working capital. However, he had a strong base of invoices due for payment. Upon exploring, he came across an online platform where he could register and get his invoices discounted on a Trade Receivables Discounting System commonly known as TReDS. This way, his invoices would get paid by reputed financiers within 48 hours through a bidding system. On TReDS, Shamsher doesn’t have to worry about following up with his buyers, as the financier would recover the money from the buyer directly, thus helping him focus on his own operations and expansion.
The story does not end here. Kamal who is a labourer working at Shamsher’s factory is a migrant from Western Uttar Pradesh. He saves a portion from every paycheck to send back home to his family. Since he and his family do not have traditional bank accounts, he relies on his colleagues who are also from his hometown and who travel back home occasionally to carry physical cash to his family every once in a while. However, now it is possible to use India Post Payments Bank which started a doorstep banking business to service remote parts of the country with a simple QR code-based card and App solution. This Aadhaar based solution is specifically designed for people with low digital familiarity.
These cases studies abound in every nook and every corner of the country. The changes brought by Financial Technology come in many different forms however they generally can be categorized into a few following key areas:
We Have The Means
Big Data Analytics has allowed financial institutions to use alternative means to analyse the credit profile of those who may not have a bank account. Think of data points such as payments and sales records, social media profile, geographical location, and records in local authorities which can now be used as a good starting point for understanding the possible credit risk of an individual. The end result of this type of approach is an increasing pool of eligible borrowers in India. By 2017, the credit bureau coverage in India had grown to 43.5 per cent of adults as compared to 21.4 per cent two years before.
Financial Technologies have significantly reduced the cost of operating small businesses. Essential operations such as identity verification, documentation, and payments, can be done much faster and at a very small cost as compared to the old paper-based processes which required large quantities of manual inputs. As a result, acquiring and servicing small ticket customers has become much more profitable. Think of a freelance consultant who can use an integrated solution to accept payments, generate an invoice, ensure GST compliance, and file her income tax returns.
New technologies are reducing geographical challenges when it comes to financial inclusion, both for businesses and individuals. As in the example of Kamal and his family in Western Uttar Pradesh, even in those parts of the country where banks find it unviable to open a brick and mortar branch, people can obtain traditional services such as loans on an ever-increasing number of mobile-based lending marketplaces.
The era of financial technology in India has already been a boon to millions of underserved yet eligible people and businesses. The adoption of new practices and behaviours is reshaping the socio-economic landscape of the entire nation. While this era has just begun, one key to its growth is the education and building of trust among and between themselves as users, their own government, and the various service providers which are starting to tie it all together.