5 Ways How Fintech Is Revolutionizing MSMEs

Technology advancements in the digital services ecosystem, such as account aggregators and OCEN make MSME lending simple

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By Oomkar Kulkarnie


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The fintech space has witnessed enormous success in the last five years and evolved further during the pandemic. It has become crucial to look at high-growth areas to boost growth. In the Indian economy, one such unorganised sector is the MSME.

The MSMEs contribute significantly to the Indian economy in terms of GDP, exports, and employment generation. Despite their smaller scale of operations, the MSMEs across India accounted for nearly 29 per cent of India's GDP but often struggle to manage finances and secure enough investment. As per the SIDBI-CIBIL Pulse report, a significant surge in credit demand increased after the 1st and 2nd waves of the pandemic. The demand for MSME loans, measured as the number of commercial credit enquiries grew 1.6x times in 2022 compared to the 2020 pre-pandemic level. As a result, the fintech institutions in India have offered MSMEs the optimism for speedy growth and relief from their issues.

Below are a few identified tactics in which fintech has revolutionized MSMEs.

Customized products: With the new technology systems and digital capabilities, fintech will be able to create innovative tailor-made products to serve the SMEs along with unveiling more financing opportunities for them. They also ensure a quick turnaround time with minimal documentation for MSME borrowers.

Apart from credit offerings, a marketplace for digital services is also made available for small businesses to connect with multiple digital solutions providers across digital payment, digital delivery, or digital discovery platforms. Moreover, as fintech enters the lending ecosystem with the help of advanced technologies such as data analytics and machine learning, they provide a vast set of customized financial solutions to their customers as per their working capital needs.

Innovative lending business models: The MSME lending landscape has been the most impactful fintech revolution. It is led by innovation, driven by technology and inclusivity. As more lending platforms emerge, smaller businesses with no financial records or credit history receive much-needed credit access. This addresses the financing needs of MSMEs that have been generally excluded because of challenges such as lack of documentation or credit history.

Crowd lending, microlending, and non-secured SME lending from non-banks are some innovative methodologies in the lending market. With new-age technologies like AI, machine learning, and data analytics, fintech companies can expand customized working capital solutions to the sector which faces a credit gap of around INR 16 lakh crore. Additionally, MSMEs also avail the benefits of the omnichannel presence of fintechs.

Seamless digital-based lending: Fintech business is built on the principles of being transparent, cashless, paperless, and contactless. This is possible by adopting accurate modern technologies and keeping it effortless for MSME borrowers. Therefore, to further encourage the paperless strategy and reduce the price of lending for MSMEs, fintech has adopted the Account Aggregator Framework (financial management and data-sharing system introduced by RBI) that facilitates the real-time sharing of financial information between regulated entities. For example, fintech provides seamless customer onboarding by using in-place tech-based identification systems, such as GSTN, Aadhaar, UPI, and other tools, for a quick and easy documentation process, including e-KYC or video-based KYC.

Providing real-time assistance without credit history: Traditional lending institutions rely a lot on the credit scores provided by credit bureaus for lending loans to individual businesses. Therefore, a lot of first-time borrowers, who have no credit history, find it difficult to borrow loans from financial institutions.

To conquer financial inclusion, regulatory bodies encourage fintech lenders to extend various financial services to small businesses with a relatively low-ticket size or no credit history. Fintechs use behaviour patterns and analytics to drive legal credit and help enterprises opt out of the informal lending system. The cashflow-based lending is one such technique enabling the advancement of loans to MSMEs by analyzing real-time cashflow data in the absence of credit history.

Co-lending partnerships: The co-lending partnerships are a "win-win" for non-banking financial companies as well as the banking sector, according to some industry experts. With co-lending being a part of the financial ecosystem, the bank-fintech partnerships help financial institutions integrate and combine their strengths to provide first to last-mile services to the MSMEs.

The vast reach of banks and fintech-led NBFCs - with their digital expertise and innovation - allows MSMEs to borrow loans from even the remotest part of the country. These co-lending partnerships help them get loans as both traditional and digital lenders analyze their structured and unstructured data to assess the risk for faster loan approvals.

Conclusion: The MSME sector has changed over the years and offers benefits to its players. Technology advancements in the digital services ecosystem, such as account aggregators and OCEN make MSME lending simple. Digital innovations will further enable the sector to rise and be a key driver of the economic and social transition.

Oomkar Kulkarnie

Head - Product & Technology, 1Pay

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