The Fintech Solution To Small Business Credit Woes
In a recent session on "The Fintech Solution to Small Business Credit Woes" organised by the Economic Times in collaboration with Digital Payments Forum and presented by mastercard.
Date of session: 23 April 2021
Speakers:
- Subhash Garg, Former Economic Affairs Secretary and Finance Secretary, Government of India
- Nitish Asthana, President & COO, Pine Labs
- Sundeep Mohindru, CEO, M1Xchange
- Kalpana Balasubramanian, CEO and Chief Thinker Grant Thornton dGTL
- Anil Bhardwaj - Secretary-General, FISME
- Rajeev Kumar, Senior Vice President, Market Development, South Asia, Mastercard
Mr. Alokesh Bhattacharyya carried forward the discussion and gave us the context with the song:
Ms. Suchetana Ray said that small businesses are always struggling. She said that currently the state of Maharashtra is facing the lockdown for 15 days and there is a continuous fear among the people there.
Mr. Alokesh said that in India there are 33 Scheduled Banks and the data of February month show that as per the data of MSMEs, the credit of large companies to mid-size companies has grown to 23%.
MSMEs take loans from Banks. Fintech companies work on Peer to Peer and Digital Models.
SMEs must take advantage of Digital Revolution.
Speaker: Ms. Kalpana Balasubramanian
Ms. Kalpana Balasubramanian said that SMBs manage money. There is internal money for people who work for you.
She said that with invoice discounting, we are getting the maximum gain. She discussed how to enable the free flow of transactions and how to ensure accessibility amongst the digital challenges. She said that every person manages his Business in a very different manner. She discussed upon how we can use Fintech. She talked about Hyper personalization that is specific to BtoB Customers. She said that we as Indian citizens are expecting quite a few advanced regulations.
Ms. Suchetana Ray said that managing money, customer regulation and user experience are really important aspects in small Businesses.
On being asked to Mr. Garg about the payment landscape for MSMEs, he explained about Government intervention and technologies. Mr. Garg said that the SME space is large and amorphous. There are around 8 Crore SMEs in the country. including the Manufacturing and Construction sector. Around 3-4 Crore people are Shopkeepers, Street Vendors, etc.
It is a heterogeneous space.
In banks, there are not more than 1 crore businesses. The government said that there are 45 Lakh such accounts.
The data states that everywhere else the Credit was going down. COVID had a very big bad impact. 6.5 Crore of the enterprises is a single account or single person based. 60-70% suffered due to COVID. Labor is getting unemployed who are around 30-40%.
The government came out with solutions such as the "Rashan Scheme". Wheat, Pulses etc. are provided free of cost. Gave a little bit of relief to Jan Dhan Accounts.
He said that the SME space is quite disorganized because there is a lot of absence of databases with the Government.
Mr. Alokesh asked Mr. Anil Bhardwaj (Secretary General, FISME) about the challenges faced by MSMEs to which he responded that talking about the Micro industry, there is little bit to inform. There is average employment. People are self - employed. In1/3rd of the cases, people work from home.
Some people are working outside with no permanent structures. Small businesses need small amount of money. They show their Property Papers to Banks. It does not require in which form you are operating. It requires your Adhar No. Loans till 45000 are given. In small companies, the challenges are different. The Credit gap is large, they have fewer assets.
The Medium enterprises have greater stability. Where there is information asymmetries and the information is not unified, there FINTECH can be of great help through AI. There are several data points (MSME data, GST data, Association Memberships etc.) So, help is provided through algorithms.
Ms. Suchetana asked Mr. Rajeev Kumar how is Mastercard helping them to which he responded that out of 20-25 million MSMEs, 6.3-8 million are Retail. They need Digitisation in securing the Credit.
Around 3 million merchants are acquired over 3 decades in metros and large metros. None of the banks want to acquire MSMEs.
When demonetization came, acceptance phase changed.
In 2021, we have 8.5 billion, merchants which accept Digital Payments.
The FINTECH companies are payment facilitators. Today there are 60+ payment facilitators and 70% of those are MSMEs.
To enable this ecosystem, they do a lot of partnerships and collaborations.
Talking about Merchant Onboarding, they developed a solution called SoftPOS on the principle of "Mobile First Mobile Only". The Merchant's smartphone will get converted into an acceptance device bringing down the cost of hardware and the ease of deployment.
Pine Labs is a company that has principle as "Buy Now, Pay Later". The consumer can go using a card, using easy installments. They have partners like RazorPay and InstaMojo. Their aim is to reach in next 3 years to 10-11 million MSMEs and 20 million merchants.
Further, Mr. Alokesh Bhattarcharyya discussing the positive outlook shifted the conversation to Mr. Nitish Asthana, who is the founder of Pine Labs who discussed about how the Digitisation of SMBs has become a reality. He said that this duration from February 2020- 2021 was a period which was really important with respect to lending perspectives because of consumer demand and generational shift.
He said that the financial books do not give a picture about Financial Statements. FINTECH - food company or Pine Labs, they tell about the frequency of transaction and GST related data, all that can be combined.
In a shorter tenure, registrations can be done. As the merchant is collecting payments, FINTECH, as well as networks, can come together with banks to get the best cost of capital, the bank has.
FINTECH brings fragility.
Mr. Sundeep said that in around 612 cities, there is M1Xchange. FINTECH is playing a role in lending cash flow. M1 has applied growth and adaptability. Earlier when they used to go to banks, people did not agree to their proposals and said that Digital Discounting will fail.
In 2020, the Banks are bidding online and within minutes, the voice gets bidded, many to many. One time only, the MSME registers, there is just one time KYC and one time Loan Registration.
Before Corona, there were 350 cities, where people were logging in. Post Corona, today there are 612 cities, people are logging in. Even micro and small enterprises, in Bihar, Assam, and down south, people are logging in. The growth is enormous. There are average invoices. They further explained about what is not discounted in all PSU businesses. Change is required in the culture and attitude of enterprises in enabled SMEs.
Pricing is done at 15-18% of the Rate of Interest. With 4-6%, with an average of 5% per annum (unsecured). No balance sheet is required of SME. No character is required of SMEs. Only the genuinity of invoices is seen. When an SME gets a loan at a rate of interest that is lower than its own working capital. Its cost cuts down. So, its customers' costs cut down. This is happening in the Private Sector world. This is very less in the PSUs.
The bank is the biggest leader. After that NBFs. Their mindsets are important. FINTECHs are working hard. How much of Business is approved for Credit. It is an evolutionary journey. Banks see cycles that are slow. All databases are now available.
Mr. Bhardwaj (Sec. Gen., FISME) said that many large companies are using the working capital of MSMEs and not from banks.
During COVID, all wrong perceptions of Digitisation have gone. Companies in all the large corporate sector are worried about the invoices of their suppliers. Currently, everything is hidden.
Mr. Rajeev further said that they had a difficulty in approaching the banks. The customers learnt it. Solution is in English. Call centres are operating in 5 languages and in 6 cities.
From Day 1, all mobile enabled solutions are there. They are instantly paid at 1% less and the money is credited to bank. Customers understood it very fast.
Ms. Suchetana Ray talking about the Digital Aspect said that Indian SMEs are offline. So, what is the core of the problem?
Ms. Kalpana said that having some money, and using it in all directions, cloud, infrastructure, etc., FINTECH plays a big role. People look at working capital financing. Everything is about the money talks.
Critical of SMBs:
Knowledge of what is critical? Talking about the Vibrant Bharat, growth sector is Technology. The Trade is inbuilt in the entire country. So, how digital becomes an advantage. They further talked about the larger digitisation perspective. At some level of change management, knowledge and infrastructure is important.
So, Ms. Suchetna Ray asked that is technology not a solution, to which Mr. Subhash responded that MSMEs do a very tough business. The kind of rates at which they borrow, many Street Vendors borrow at Rs. 2000 and pay Rs. 200 (as interest) because no one lend to them.
Their payments are also becoming digitalized. If we can show growth in the Technology industry, there are big business opportunities which we can expand for big time investment.
For small time investment, borrowing Rs. 2000 is also a big thing.
Talking about the Receivables/ Payables, they said that around 1.3-1.4 Core Enterprises have GST of which 70-80 lakh, file their returns.
The speaker further discussed about Digital Lenders, Digital FINTECH companies. We need to create a system where there is Digital Discounting. Out of the MSMEs (incorporated enterprises) in around 8 crore, nothing gets generated in the system.
Mr Nitish said that wherever small businesses see the value, they will digitalize. They may not require to invest in infrastructure because of a lot of free options.
The challenges are:
1. Lending of Banks and FINTECHs.
2. Their aim is to create standardized APIs.
It could be a technology service provider. Data, technology, capital, distribution are all important. If we keep doing between these in an iterative manner, then confidence takes a lot of time.
In digitisation, there are gaps, KYC process is there. Small businesses have single owner and small stores.
So the idea is that Banks and FINTECHs can exchange KYCs. Then the process can become a lot more easier. In a lot of banks, the cost of acquisition is higher. It takes there 15-45 days for the process to complete.
Ms. Suchetana asked that strategically how can FINTECH companies play an important role?
Ms Kalpana Balasubramanian further explained that it is important to know which market you want to capture and what is the customer segment there and what value I am going to add there?
The speakers further said that there needs to be a bridge, the issue is taking business as a commercial entity and said that talking about the legacy of past, they asked that why electricity use at work place is more than electricity use at residence. There should be a productive use.
We need to do away with the various distinctions within our mind. Earlier it wasn't possible or people did not believe in this much and working from home was not permissible. Then in COVID situation, it was made legal. When small businesses are manufacturing from home, there could be pollution issues but at the same time, non- hazardous manufacturing needs to be open.
This will definitely help the digital and fintech companies.
Mr. Sundeep said that every FINTECH should ensure that they scale up very fast. There needs to be a confidence of finances because it is all unsecured lending. To bring back that confidence, build an algorithm and predict that you don't create decisions.
During the IL&FS crisis, India faced Crash Crunch. Traders learnt a hard way then.
Check out the sources:
https://www.business-standard.com/about/what-is-il-fs-crisis
Mr. Alokesh discussed about the FINTECH lending models and the discussion was carried forward by Mr. Rajeev (Mastercard) who explained about the SoftPOS or TapON Phone solutions. It allows merchants to capture cash transactions. To make an online store, have partnered with a firm, for everything across GST and Inventory Managament.
The credit scores in India, have potential loans and value added services.
Ms. Kalpana Balasubramanian asked about how regulation can be resisted? What is the role of regulation in terms of speedening? There needs to be Checks and Balances.
Mr. Rajeev responded that investments are necessary. Around 250 Crores have been allocated over next 5 years to support SMEs. They have been clearly focused on women entrepreneurs.
Mr. Nitish further said that there is a distinction between what do you do very well from the regulatory aspects. There is a risk. It is the responsibility to keep the confidence of the financial system.
Experience says that digitise the merchant first. Digitise their store. Make it very contextual. Get the expertise to bring distribution. Bringing capital to their journey. Bring In Capital is important. The cost of capital is very high. So, you are ultimately lending at 27-28%.
Mr. Sundeep added on to this that there is a regulated environment in M1Xchange.
Why is the regulator not relaxing it? He say that now they have seen the South East Asian Countries, UAE, Gulf Countries. Amongst all these countries, India is at a better place.
Crisis is that we have a fast growth. Safeguarding the ecosystem is important. Regulator is important.
Ms. Sulechana further said that troubles facing MSMEs. Demonetization was there in 2016. GST was in 2017. Then there was IL&FS crisis. Further there was COVID situation.
With all this, there has been an acceleration of technology. Without COVID, it would have taken a decade. There is a need to find solutions as to how to easen about the future models of FINTECH.
Further we heard the speakers talking about finding the solutions to small business owners.
Session Video Source:
https://youtu.be/CPoxHbkHmjk
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