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Plugging Funding Gaps for MSMEs Through Supply Chain Finance Supply Chain Finance (SCF) companies are fast emerging as preferred lending solutions partners for the vastly under-served MSME sector, powered by new-age, advanced financial technologies, new SCF tools hold the promise to mitigate

By Harshad Malhotra

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The Micro, Small and Medium Enterprises (MSME) sector in India is the backbone of the Indian economy. Propelling the country's industrial growth and development on a higher trajectory, they are also vital to driving trade and generating employment. Data from the Ministry of Commerce alludes to the fact that more than 51 million MSMEs operate across the geographical expanse of India and provide employment to around 117 million people across diverse segments. Its contribution to the country's total Gross Domestic Product (GDP) is pegged at around 37per cent with an approximate share of 43per cent to exports. The MSME sector in the country is a huge untapped segment with vast growth potential. However, it has been typically observed that the expansion of the sector has been bottlenecked on account of lack of access to formal working capital finance from traditional lending institutions on affordable terms.

Preferred Lending Partners for MSME Sector

Supply Chain Finance (SCF) companies are fast emerging as preferred lending solutions partners for the vastly under-served MSME sector. Powered by new-age, advanced financial technologies, new SCF tools hold the promise to mitigate the funding woes of small-scale businesses. These new-age fintech lenders have the potential to change the funding ecosystem for small enterprises through bespoke credit offerings and innovative lending products. As compared to large lending institutions, SCF lenders have a wider outreach among small businesses, ensuring faster loan approvals and seamless transaction processing on timely schedules with flexible terms. SCF entities have distinguished themselves by building a tech-enabled operational interface which has been vastly instrumental in alleviating bureaucratic red tape and limitations normally associated with traditional lenders. An emerging generation of financial players has succeeded in enabling the expansion and thriving of small businesses by ensuring a level playing field between them and large enterprises.

Role of Government Initiatives and Technological Developments

Key government initiatives and expeditious developments in the Indian telecom and technology domain have positioned the MSME sector on a major disruption course. With a massive reduction in mobile internet tariffs, India offers the cheapest mobile data in the world. This has resulted in an exponential rose in consumption of data on a Pan-India basis and brought several MSMEs within the digital fold. It is anticipated that MSMEs in the country is likely to achieve a massive digital footprint with record data access and consumption. A unique software platform in the form of the "India Stack", defined as a set of Application Process Interfaces (APIs) facilitating a seamless connection between servers and devices, has the potential to build a huge data resource which can be accessed by fintech players.

The roll-out of the Goods and Services Tax (GST) in the country was pivotal to nearly 9.2 million MSMEs getting registered under GST. A core factor that led to the formalization of MSME's was the roll-out of the Goods and Services Tax (GST) in the country. With all activities from registration to filing returns undertaken on the GST portal, MSMEs have a discernible digital data presence. Stored in a granular format, this huge verified database can be easily accessed electronically by SCF institutions (post consent of the customer) which allow for easy assessment of MSMEs credentials, gives verified insights about the MSMEs business and helps in making faster credit decisions

Facilitating Business Expansion and Efficient Cashflow Management

The SCF framework facilitates business expansion and higher sales and turnover for MSME businesses. It also enables efficient cash flow management for small business players across the supply chain. Since SCF limits are largely un-secured, SCF institutions play the crucial role of a catalyst in boosting the capital competencies of MSMEs and allows for better inventory management and additional working finance.

The SCF segment is rapidly gaining traction with small business enterprises and has enormous growth potential. As global economies turn increasingly volatile and business competition the world over gets intense, access to affordable / un-secured working capital will be a key differentiator which will decide the success or failure of small and medium businesses.

Harshad Malhotra

Director and Head - Business at LIVFIN Finance

Mr. Malhotra is the Director and Head - Business at LIVFIN Finance, an invoice-based supply-chain financing NBFC. He has over 17 years of experience in Banking Sector with specialized expertise in Relationship Management, Business Development, Portfolio Management, Trade Forex, Supply Chain Finance and SME Loans. He has a proven track record of successfully launching new products and services for banks across various markets and segments. His previous stints were with Citi Group, ABN Amro and Development Bank of Singapore. 

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