Fintech
“A regulatory approach is needed that supports fintech innovation and addresses SME challenges” – SME News
By Arun Poojari
IndiaThe economic engine of is currently on an upward trajectory, with growth projections for the fiscal year 2024-25 exceeding expectations. Undoubtedly, a major factor in this success comes from PMI (Micro, Small and Medium Enterprises), which contribute a significant 30% to the country’s GDP. However, the sector continues to face several challenges in terms of financing, financial education and operational efficiency.
The reserve Bank of India (RBI), through its influence on the cost of borrowing, the availability of credit and, in general, money supply, is a key player in promoting an enabling environment for PMI growth. For example, their latest decision to keep the repo rate at 6.5% in February 2024, combined with stable inflation forecasts, was aimed at stabilizing borrowing costs, making financial planning easier for SMEs.
This strategic move allows SMEs to obtain loans with greater certainty, allowing for better investment and expansion decisions. Furthermore, controlled inflation can help the sector mitigate rising production expenses, potentially reducing raw material and energy costs, thus alleviating financial pressure on SMEs and improving access to short-term loans and working capital.
The recent intervention by the RBI for MSME lenders is a game changer. They have mandated all regulated entities (REs) to provide borrowers with a ‘Key Facts Statement’ (KFS) for retail and MSME loans. This new requirement ensures that lenders disclose the detailed terms of the loan, including the all-inclusive interest cost, in the KFS. Since the KFS was previously required only for commercial bank loans to individual borrowers, digital loans from RBI regulated entities and microfinance loans, this measure is expected to have a significant positive impact on the MSME sector, which faces challenges in accessing formal credit.
Today, out of 630 lakh SMEs, only 250 lakh are in the formal credit ecosystem and these guidelines are expected to spur higher credit demand from SME borrowers. By ensuring transparency and using alternative data, regulated entities (REs) will be better equipped to extend credit to the priority sector, thereby improving financial inclusion within the ecosystem.
Simplifying the regulatory framework for SMEs
The RBI has also unveiled major initiatives to improve the financial ecosystem. First, the PRAVAAH portal streamlines online applications for regulatory approvals, making the process seamless for individuals and entities. Second, the RBI Retail Direct mobile application provides retail investors with convenient access to the Retail Direct platform, facilitating easy transactions in government securities. Lastly, the fintech repository offers comprehensive information on the Indian fintech sector, helping in regulatory understanding and policy development.
These initiatives are designed to streamline regulatory processes for SMEs, thereby improving operational efficiency and reducing administrative burdens, in addition to expanding investment opportunities and potentially increasing financial returns by facilitating easier access to government securities. By promoting collaboration between fintechs and regulated entities, the RBI aims to foster an environment where stakeholders can use information from the repository to strengthen security practices and drive innovation.
Additionally, platforms like the Public Tech Platform for Frictionless Credit (PTPFC), piloted in 2023, facilitate access to small loans by connecting borrowers and lenders. Specifically targeting SMEs, this initiative promotes collateral-free lending. While monetary policy typically focuses on managing money supply and interest rates, the RBI’s engagement with PTPFC underscores its dedication to promoting financial inclusion and improving the efficiency of credit delivery systems.
In conclusion, there is an urgent need to promote alternative financing models and streamline loan application processes, especially for SMEs located in rural and semi-urban areas. The RBI has previously launched digitalisation initiatives such as TReDs and the Account Aggregator framework to facilitate frictionless credit. Fintech companies are crucial in this landscape, offering innovative digital solutions. These solutions include various digital tools, platforms and applications that enable small businesses to access convenient and efficient financial services, streamline operations and improve competitiveness, even in smaller regions.
Today, a regulatory approach is needed that strikes a balance between supporting fintech innovation and effectively addressing the challenges of SMEs. Policy reforms should aim to harmonize regulations across jurisdictions and promote collaboration in sharing successful innovations.
Arun Poojari is the co-founder and CEO of Cashinvoice. The views expressed are personal. Reproduction of this content without permission is prohibited.