The Small and Medium Enterprises (SME) accounts for 30% of India’s GDP and provides employment to 12 Crore Indians. These 6.3+ Crore SMBs survived the headwind of Covid-19 with multiple credit schemes, moratorium during the last 2 years and is now coming back to the growth and profit curve.
Financial Institutes now have many enabling regulation and infrastructure to serve the SME segment: It would be now time for the banks, NBFCs and Insurance companies (Financial Institutes) to leverage regulatory changes and enabling infrastructure like Aadhaar, UPI, Account Aggregators, GST, TReDS platform, Public Credit Registry, Central Bank Digital Currency (that is coming in future) to enable SMEs to thrive.
Demand of capital from SMEs are back so that they can lock-in before rate hike and right selection by Financial Institutes would be key: SMEs are now looking back for sustenance and growth capital as business is coming back to pre-Covid levels. SMEs were possibly fragile but being agile to cut cost, will be emerging stronger in the new fiscal year.
Speed to capitalise on the demand side by leveraging enabling framework would be key for Financial Institutes: The re-opening and re-bound market is a time window driven phenomenon. The right SMEs who have survived and thrived over the last 2 years are the right ones to be selected and onboarded in the Financial Institute books. All the Financial Institutes are targeting them and the ability to identify them would make difference of lower or higher non-performing asset (NPA) in 4 quarters in the Financial Institute books. In case the banks delay in identifying this opportunity or delay in selecting the right SME – both will impact the growth and profitability of the bank, NBFCs and Insurance companies.
Financial Institutes have a time bound opportunity and to leverage the journey they started pre- Covid. For the progressive Financial Institutes in the SME space, the modernisation journey pre-Covid was re-strategized during Covid and continuing post covid.
Pre-Covid initiatives:
Block-chain enablement for Supply Chain and Trade Finance e.g. progressive manufacturing houses with financial services arm enabled block-chain for suppliers and dealers, Garment industry body of a neighbouring country enabled trade finance.
Financial institutes prepared themselves for GST, eWay bill and FasTag enabled credit triangulation leading to convergence of components.
Structured product programs especially for Micro SMEs leading to Straight Through Processing.
Beyond Banking proposition including Accounting, Advisory and Tax services.
Smart contracts driven logistics, insurance, IoT, financing platforms.
Restrategized and augmented during Covid:
Faster enablement of moratorium, subsidy, credit guarantee scheme, restructruring that were allowed from time to time.
Launch and support in adoption of newer products – fuel loan, tire repair loan, micro-loans, rental payment loan.
Launch apps for SMEs for Business Banking – Digital current account, over-draft, working capital and term loan based on real time understanding of Cash flow through alternate data source. The same trend was visible in global markets e.g. HSBC Kinetic in the UK.
Started API exposure by ‘hollowing of the core applications’.
Continuing post-Covid:
Cross border and domestic payment enablement with efficiency in mid and back- office optimisation.
Launch of Super App for availing different services by SMEs.
However, to capture the potential, the Financial Institutes would be prudent to augment their capability and increase their co-operation with FinTech and InsurTechs. This will enable higher capability, faster time to market. To support the Financial Institutes, there are two types of FinTech and InsurTechs
• Distribution and Experience enablement FinTechs who help in aggregation, expansion, reach and digital customer facing
• Specialized Service enablement FinTechs who help in capability enhancement through decoupling of a bank
Financial Institutes should partner with both ends with the spectrum to transform faster through co-optation model. Distribution and Experience FinTechs should however not just enable distribution but provide value added services. The value added services like credit appraisal memo (CAM) automation, pre-under-writing recommendation, data aggregation, co-lending will enable risk- sharing, right-selection and lowering of cost-to-income ratio for the Financial Institutes. The Specialised Services FinTechs would augment the Financial Institute to embrace externally driven innovation with pointed solution. The re-imagined use cases are a key potential for Banks, NBFCs and Insurance companies to engage SMEs better e.g. PoS based lending, Cashflow based credit evaluation, triangulation based credit evaluation of FasTag, eWay bill, GST etc. The use cases on transaction banking are even more with transaction banking related automation – Cash management, Supply Chain Finance and Trade Finance and H2H payment services leveraging block-chain, smart-contract (TradeLens, PartnerLinQ, ImportYeti) and IoT.
Capturing the SME opportunity for profitable growth is going to be a key driver to build the Financial Institutes portfolio further in a meaningful way. The progressive Financial Institutes with a right digital focus and co-optation with FinTechs will carve out a winning proposition for themselves.
The article has been written by Siddhartha K Ghosh, Cluster Leader, Financial Services Sector, IBM, India/South Asia
(The author has consulted many leading enterprises in BFSI, eCommerce and FinTechs in India and abroad in Digital and Data driven transformation. All viewpoints expressed are completely personal).
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