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Impact of FinTech and Government Schemes on Indian MSME

8 Oct 2018

The MSME Sector of India has been contributing to the country’s booming economy in large proportions, specifically a massive 45% of the Gross Domestic Product (GDP). The MSME Sector is responsible for the employment of nearly 50 million Indians. Micro, small and medium businesses contribute to 45% of the manufacturing sector, 40% of the country’s exports and 69% of the employment sector.

It is surprising to note that although MSME businesses contribute to the country’s economic growth, they are most often the ones that suffer from a lack of capital. This need for capital needs to be met efficiently and adequately. The FinTech industry is what meets this need in a way that aids in the growth of these small businesses and hence, the growth of the country’s economy at large.

As evident from its name, the FinTech Industry is where technology meets finance. The digitization of financial transactions, lending and borrowing, trading, insurance and more is what constitutes this industry. This has tremendously helped to streamline all the processes in the finance industry that needed hours and hours of manpower. From Bitcoin to Blockchain and from Open Banking to Robo-advising, FinTech offers a vast range of innovations that optimizes and increases the accuracy of traditional financial products and services.

Micro, small and medium businesses also greatly benefit from the schemes that the government has implemented. One of the most important schemes launched by the Government of India is the MUD₹A (MUDRA) scheme which allows start-ups and small businesses to access capital ranging from ₹50,000 to ₹10 lakh! More specifically, the government provides refinance support to banks, Non-Banking Financial Institutions, Micro Finance Institutions and other such similar organizations so that they can aid small businesses to grow and expand. It was launched in 2015 and has already benefited numerous business across various states in the country. Other than this, the scheme also aids MSMEs to digitalize, promote and develop their businesses. Here let me show you a brief gist of what this looks like:

Other than the MUDRA scheme, one of the major ideas to aid businesses is the Udyog Aadhaar Memorandum. This was developed by the UIDAI (Unique Identification Authority of India) and it allows businesses to register officially as a business operating in the country by providing them with a unique 12-digit code on successfully filing their application. So far, a total of 5,264,224 MSMEs across all the states of India have registered and the benefits are tremendous!

Why would the owner of a small business want to do a government registration?

Several benefits are enjoyed by businesses that register using the UIDAI website. Exemptions on taxes, reduction in fee for filing patents, credit guarantee schemes and a concession in your electricity bills are just a few of the long list… Here, let me show you the full list:

The schemes developed by the government and the advancement of technology with time have greatly aided the growth of micro, small and medium enterprises and the growth of the nation’s economy at large. This is due to the fact that the FinTech industry and the government’s schemes have simplified the availability of finance and also increased the chances of getting much needed capital for firms that previously required lengthy paperwork and could only borrow money against securing a piece of their personal property. Moreover, the FinTech industry has enabled every organization, no matter what the size or the recognition of the business is, to access as much capital as needed, as long as they meet the criteria that are set for them. The growth rate of the MSME industry has immensely benefited India’s growing population in innumerable ways, from employment to export and much more.

However, at the same time, the increasing availability of finance has disrupted the finance sector of India in some ways. Recently, many Indian public-sector banks suffered from a sudden increase in bad debts and a large drop in profit margins. Some banks were even shut down due to the non-performing assets (NPAs) that had accumulated over years and years of lending. Evidence pointed to the fact that majority of the non-performing assets were debtors and a vast majority of the debtors were from small organizations that could not afford to pay back loans and the sum of interest that was incurred on them. Moreover, several FinTech firms also suffered from increasing NPAs, owing to the same cause i.e. small firms that could not pay back their borrowed money. The total amount of NPAs in PSUs (Public-Sector Undertakings) was ₹7.33 lakh crore as of December 31, 2017.

However, many FinTech companies are increasingly taking measures to make sure that their NPAs are not accumulating over time. Assessing the health of a business before lending money is one of the steps that FinTech firms adopt. This is done by looking at the past borrowing records, credit exposure, credit type, credit duration and so on. These factors determine what your credit score is, which is updated from time to time. Generally, most lending firms look at your CIBIL© Score, which is a standardized score that can be produced on uploading your financial documents on TransUnion CIBIL©’s website.

At KNAB Finance, we assess the health of a business using 300+ variables, not just to assess the financial condition of the company, but also to understand and address the financial needs of the business in a better manner.

The MSME sector has impacted and continues to impact many entities during its growth period. By providing employment to millions of Indians, the MSME sector has transformed the lives of people and given hope to many individuals. The rate at which the Indian MSME sector is growing is phenomenal, but it requires its stakeholders to keep up with the pace of its growth. On the other hand, the goals of a small business also need to be realistic in order to make sure that the impact of the growth is positive for all stakeholders – the government, employees, business owners, customers and lenders. India’s MSME sector has a huge potential and has the capacity to transform India into a superpower in the years to come. However, realistic expansion goals supported by adequate and an appropriate form of funding along with support from all key stakeholders are required to realise this broader vision.

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