Fintech | MSME: Why India needs a new fintech platform for MSMEs

As India embarks on a journey to become truly self-reliant and ensure ‘Atmanirbhar Bharat’ becomes a reality, the manufacturing sector, especially the Micro, Small & Medium Enterprises (MSMEs), will be the flag bearers of this movement. But, first, we must iron out the creases in their path and remove the bottlenecks.

A jarring bottleneck is the lack of smooth access to credit and liquidity, disrupting the supply chain. MSMEs invest in raw materials and labor prior to manufacturing and subsequently have to provide 30-60 days of credit to their customers: delayed payments from customers risks derailing the execution for future orders.

According to an article in the
Economic Times last year, ‘MSMEs in India account for 99 per cent of all enterprises, comprising 63 million MSMEs across industries and geographical locations.’ The article further stated that a survey by Ernst & Young amongst 1000 MSME entrepreneurs found that ‘70 per cent of them were adversely impacted during Covid-19 due to reduced orders, loss in business, availability of raw material and liquidity issues,’ essentially telling us why easier and credible sources of credit/financing are even more crucial for this sector.

Therefore, the most pressing challenge is democratizing trade receivable discounting in the Indian B2B ecosystem and creating sustained liquidity and value across 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 scope of the financial products for them. Most lending by banks/NBFCs is based on collaterals, and it is on that front that MSMEs suffer and lag. How can we further innovate and drive access to credit for MSMEs? Can MSMEs be given loans based on data points like current assets (inventory/receivables) and GST payments?

The Trade Receivables Discounting System (TReDS) platforms have grown significantly over the last couple of years in the current landscape. However, they suffer from multiple issues that have limited their growth and restricted their reach. The Trade Receivables Discounting System (TReDS) platforms have grown significantly over the last couple of years in the current landscape. However, they suffer from multiple issues that have limited their growth and restricted their reach. These include not being a vendor first platform, restrictions on the type of anchors that can be onboarded, limited incentives for anchor to use the platform and allowing only banks to finance.

In parallel, many new-age companies in partnership with new-age lenders/fintech have been able to gain traction in building effective transaction financing solutions for their ecosystems and have thereby ensured capital availability for their stakeholders.

Therefore, a new fintech platform is needed that will democratize transaction-based financing for all stakeholders.

The proposed model

In that spirit, the new platform needs to operate on some primary focus points — putting the MSME first, increasing anchor coverage, financing from institutions and individuals, embedded finance using transactional data and recourse from anchors, and leveraging transaction data using GST e-invoicing.

To begin with, unlike most of the current platforms, the new platform should have transactions initiated by vendors and primarily driven to service their financing needs. It is also essential to ensure that more industries and all sizes of corporations fall under the program, other than just the large corporations. Diluting the eligibility criteria for corporates, to include mid sized corporates and also high growth startups who could be loss making but with strong balance sheets, will impact the penetration of this product, democratizing it and, thereby, the entire value chain.

Moreover, the platform must be open to financing from all Lending Institutions (Banks & NBFCs), other Financial Institutions (Mutual Funds, Insurance Companies, Pension Funds, etc), Corporate Treasuries, including from the anchor corporate itself, and Retail Investors. The intent should be to lower threshold for corporates and increased liquidity by adding more financiers will result in access to more capital to vendors.

Further, anchors can opt in to provide detailed transaction-based information on suppliers, financial data about themselves and also a firm recourse for effecting payment on due dates. Integrations with the government’s e-invoicing portal can also give access to almost 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 the first right of refusal to finance the transaction using their corporate treasury. This is in order to incentivize the anchor to participate in the transaction. The lack of incentive for the anchor corporate, we believe, has been a significant reason for other platforms to have a limited uptick. This scenario, however, is limited to the liquidity available by the anchor/buyer’s treasury team and, thus, might see extensive participation from lender partners.

In the case, when the anchor/buyer cannot participate, the participant lenders can finance the invoice by bidding for the invoice, making it transparent for the vendor to choose the offer and receive payment against the transaction.

The entire point of the new platform with the features mentioned above is to ramp up its usage across vendors & buyers, thereby creating exponential value across the supply chain.

(Amrit Acharya & Srinath Ramakrushnan are Co-Founders of Zetwerk Manufacturing Businesses)

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