MSMEs: why India needs a new fintech platform for MSMEs
A jarring bottleneck is the lack of smooth access to credit and liquidity, disrupting the supply chain. MSMEs invest in raw materials and labor before manufacturing and then have to provide 30-60 days of credit to their customers: late customer payments risk derailing the fulfillment of future orders.
According to an article in the Economic Times last year, “MSMEs in India make up 99% of all businesses, comprising 63 million MSMEs across all sectors and geographies”. The article further stated that an Ernst & Young survey of 1,000 MSME entrepreneurs found that “70% of them were affected during Covid-19 due to reduced orders, loss of business, availability of raw materials and liquidity issues”, essentially revealing why easier and credible sources of credit/funding are even more crucial for this sector.
Therefore, the most pressing challenge is to democratize the discounting of trade receivables in the Indian B2B ecosystem and create sustainable liquidity and value throughout the supply chain.
The current need
The key question is how to innovate financial products based on different data points for MSMEs and other cogs in the manufacturing/supply chain and how to expand the reach of financial products for them . Most bank/NBFC lending is based on collateral, and it is on this front that MSMEs are suffering and lagging behind. How can we innovate more and promote access to credit for MSMEs? Can MSMEs qualify for loans based on data points such as current assets (inventory/receivables) and GST payments?
TReDS (Trade Receivables Discounting System) platforms have grown significantly over the past two years in today’s landscape. However, they suffer from multiple issues that have limited their growth and restricted their reach. TReDS (Trade Receivables Discounting System) platforms have grown significantly over the past two years in today’s landscape. However, they suffer from multiple issues that have limited their growth and restricted their reach. These include not being a provider-first platform, restrictions on the type of anchors that can be integrated, limited incentives for the anchor to use the platform, and not authorize only banks to finance.
At the same time, many new era companies in partnership with new era lenders/fintechs have been able to gain momentum by creating efficient transaction finance solutions for their ecosystems and thereby ensuring the availability of capital for their stakeholders. .
Therefore, a new fintech platform is needed to democratize transaction-based finance for all stakeholders.
The proposed model
With this in mind, the new platform needs to work on some key points – prioritizing MSMEs, increasing the coverage of anchors, financing institutions and individuals, integrated financing using transactional data, and leveraging anchors, and leveraging transaction data using electronic GST invoicing. .
For starters, unlike most current platforms, the new platform is expected to have transactions initiated by sellers and primarily focused on their funding needs. It is also essential to ensure that more industries and companies of all sizes come under the programme, other than just large companies. The dilution of the eligibility criteria for companies, to include medium-sized companies and also high-growth startups that could be loss-making but with strong balance sheets, will have an impact on the penetration of this product, by democratizing it and, therefore, across the entire value chain.
In addition, the platform must be open to funding from all credit institutions (banks and NBFCs), other financial institutions (mutual funds, insurance companies, pension funds, etc.), treasuries companies, including the parent company itself, and retail investors. The intention should be to lower the threshold for companies and increasing liquidity by adding more financiers will result in access to more capital for suppliers.
Additionally, anchors can choose to provide detailed vendor transaction information, financial data about them, and also firm recourse to make payment on due dates. Integrations with the government’s e-invoicing portal can also provide access to near real-time transaction data.
The platform should leverage the Account Aggregator framework to create a seamless onboarding experience for vendors.
The fine print
The proposed model will give the anchor first right of refusal to finance the transaction using its corporate cash. This is to induce the anchor to participate in the transaction. The lack of incentive for the anchor business, we believe, has been a big reason why other platforms have limited upside. This scenario, however, is limited to the liquidity available by the anchor/buyer treasury team and, therefore, could see broad participation from lending partners.
In the event that the anchor/buyer cannot participate, participating lenders can finance the invoice by bidding on the invoice, allowing the seller to choose the offer and receive payment for the transaction.
The point of the new platform with the features mentioned above is to increase its usage by suppliers and buyers, creating exponential value in the supply chain.
(Amrit Acharya and Srinath Ramakrushnan are co-founders of Zetwerk Manufacturing Enterprises)