To build ‘Atmanirbhar Bharat’, the Ministry of Micro, Small & Medium Enterprises (MSMEs) sector needs to be robust and function smoothly, without bottlenecks and inefficiencies that hamper the upscaling and growth. The growth of fintech platforms has played a major role in increasing financial inclusion in India, digitising payments and enabling more micro and small businesses across the country to access financial instruments that are often beyond their reach through the banking system.
Barriers & Challenges
However, the problem of delayed payments and lack of access to timely, adequate credit continues to hamper the growth of the MSME sector, particularly in the case of supply chains. Most MSMEs invest heavily in raw materials and labour before manufacturing and offer 30-60 days’ credit to their customers. The COVID-19 pandemic and lockdown severely strained Indian MSMEs’ supply chain network, demonstrating the need for robust, digitally-driven supply chains and management systems, as well as the need for ready access to working capital to tide over payment delays and continue operations.
The Trade Receivables Discounting System (TReDS) platforms have grown since its inception. However, they are hampered by not being vendor-first; by restrictions on the types of anchors allowed onboard and limited incentives for anchors onboard; and by the fact that only banks may finance the receivables discounting.
Changing Trends
The last few years have witnessed a rise in new-generation fintech platforms that partner with MSMEs to build innovative transaction financing solutions and ensure the availability of capital for their partners. This shows that there is a need for a new-age fintech platform that can effectively democratise transaction-based financing for MSMEs and startups.
The focus needs to be MSME-centric: putting MSMEs first, increasing anchor coverage, broader sources of financing, embedded finance through transaction data and recourse from anchors, a seamless onboarding process for vendors, and leveraging transaction data by GST e-invoicing. Transactions should be initiated by the MSME vendors and geared towards meeting their financial needs. The platform should include all companies, regardless of size, sector, and industry vertical. Furthermore, all financial institutions should be included on the platform, from banks and Nonbank Financial Companies (NBFCs) to Mutual Funds, Insurance Companies, Pension Funds, Corporate Treasuries as well as Retail Investors. The larger the pool of financiers, the broader the access to capital for smaller companies.
Anchors can provide detailed transactional data of suppliers and financial information about them as well as function as a recourse for timely payments. By integrating with the government’s e-invoice portal, the platform can even access transactional data in real-time.
Anchors may also have the right to refuse financial transactions using their corporate treasury. This will help incentivise anchor participation in the transaction. In case the anchor cannot participate, other participating lenders can bid to finance the invoice, allowing the vendor to select the best offer and receive payment at their discretion, in a transparent manner.
The fintech sector can and should move beyond digital payment systems for MSMEs and seek to leverage new-age technologies such as artificial intelligence, blockchain, machine learning, and big data to create products that meet the specific needs of the MSME sector. Thus stimulating the country’s desire to be truly self-sufficient.