Small and Medium Enterprises (SMEs) account for 30% of India’s GDP and employ 12 Indian Crore. These 6.3+ crore SMEs survived the headwind of Covid-19 with multiple credit schemes, a moratorium over the past 2 years and are now coming back on the growth and profit curve.
Financial institutions now have many enabling regulations and infrastructure to serve the SME segment: Now would be the time for banks, NBFCs and insurance companies (financial institutes) to take advantage of regulatory changes and enabling infrastructure such as Aadhaar, UPI, account aggregators, GST, TReDS platform, public credit registry , central bank digital currency (coming in the future) to enable SMEs to thrive.
SME demand for capital is back so they can lock in before rates rise and good screening by financial institutes would be key: SMEs are now turning to sustenance and growth capital as business returns to pre-Covid levels. SMBs may have been fragile, but being nimble in cutting costs, they will emerge stronger in the new fiscal year.
Speed to leverage the demand side by leveraging an enabling framework would be key for financial institutes: Market reopening and rebounding is a time window driven phenomenon. The good SMEs that have survived and prospered over the last 2 years are the right ones to be selected and included in the books of the Financial Institute. All financial institutes target them and the ability to identify them would make the difference between a lower or higher non-performing asset (NPA) over 4 quarters on the books of financial institutes. If banks are slow to identify this opportunity or slow to select the right SME, both will impact the growth and profitability of the bank, NBFCs and insurance companies.
Financial institutions have a time-limited opportunity and to build on the journey they started before Covid. For progressive financial institutes in the SME space, the pre-Covid modernization journey was redefined during Covid and continued after Covid.
Enabling blockchain for supply chain and trade finance, e.g. progressive manufacturing houses with a financial services arm enabling blockchain for suppliers and resellers, a blockchain industry body garment from a neighboring country enabling trade financing.
Financial institutes prepared for GST, eWay invoice and FasTag enabled triangulation of credits leading to convergence of components.
Structured product programs especially for micro-SMEs leading to straight through processing.
Beyond the banking proposal, including accounting, advisory and tax services.
Logistics focused on smart contracts, insurance, IoT, funding platforms.
Restrategized and augmented during Covid:
Faster activation of moratorium, subsidy, credit guarantee scheme, restructuring which have been authorized from time to time.
Launching and supporting adoption of new products – fuel loan, tire repair loan, micro-loans, rent payment loan.
Launch SME apps for business banking – Digital current account, overdraft, working capital and term loan based on real-time understanding of cash flow through another data source. The same trend was visible in global markets, for example HSBC Kinetic in the UK.
Start of API exposure by “digging into core applications”.
Enabling cross-border and domestic payments with efficiency in mid-office and back-office optimization.
Launch of Super App to benefit from various services by SMEs.
However, to seize the potential, financial institutes would be cautious to increase their capabilities and increase their cooperation with FinTechs and InsurTechs.. This will allow for greater capacity and faster time to market. To support Financial Institutes, there are two types of FinTech and InsurTech
• Distribution and experience enabling FinTechs that help with aggregation, expansion, reach and digital contact with customers
• FinTechs of enabling specialized services that contribute to the improvement of capacities thanks to the decoupling of a bank
Financial institutions should partner with both ends of the spectrum to transform faster through the cooptation model. Distribution and experience FinTechs should however not only enable distribution, but provide value-added services. Value-added services such as Credit Assessment Score (CAM) automation, pre-underwriting recommendation, data aggregation, co-lending will enable risk sharing, proper screening and reduction of the cost/revenue ratio for financial institutions. Specialized services FinTechs would augment the Financial Institute to embrace externally-led innovation with a sharp solution. Re-engineered use cases are a key potential for banks, NBFCs and insurance companies to better engage SMEs, e.g. POS based lending, cash flow based credit scoring , credit scoring based on triangulation of FasTag, eWay invoice, GST, etc. Transaction banking use cases are even more so with automation related to banking transactions – cash management, supply chain finance and trade finance and H2H payment services leveraging blockchain, smart contracts (TradeLens, PartnerLinQ, ImportYeti) and IoT.
Seizing the opportunity of SMEs for profitable growth will be a key driver to further develop the portfolio of financial institutes significantly. Progressive financial institutes with a good digital orientation and cooptation with FinTechs will carve out a winning proposition.
The article was written by Siddhartha K Ghosh, Group Head, Financial Services Sector, IBM, India/South Asia
(The author has consulted many leading companies in BFSI, eCommerce and FinTech in India and abroad in the digital and data driven transformation. All points of views expressed are entirely personal).