Manufacturing companies, particularly Micro, Small & Medium Businesses or micro MSME fintech companies, will lead the effort for India to achieve true self-sufficiency and make “Atmanirbhar Bharat” a reality. But first, we need to smooth out the wrinkles and clear the bottlenecks off their route.
Lack of easy access to finance and liquidity is a startling constraint that messes up the supply chain. Prior to production, MSMEs spend in labour and raw materials, and as a result, they must provide their customers 30 to 60 days of credit. If consumers don’t make their payments on time, this might delay the execution of future orders.
A study claims that “MSMEs in India constitute for 99 percent of all firms, encompassing 63 million MSMEs across sectors and geographic regions.” The article went on to say that a survey by Ernst & Young of 1000 MSME entrepreneurs revealed that “70% of them were negatively affected during Covid-19 because of decreased orders, loss in business, raw material availability and liquidity issues,” essentially explaining why it is even more important for this sector to have accessible and reliable sources of credit and financing.
Consequently, the most urgent task is democratizing trade receivable reduction in the Indian B2B ecosystem and producing sustainable liquidity and value throughout the supply chain.
The Present Need
The main issue is how to develop new financial products for MSMEs and other participants in the production/supply chain based on various data points and how to broaden the range of financial products available to them. The majority of financing by banks and NBFCs is predicated on collateral, and it is here where MSMEs struggle and fall behind. How can we continue to innovate and promote MSMEs’ access to credit? Is it possible to grant loans to MSMEs based on indicators like current assets?
In the recent years, platforms for the Trade Receivables Discounting System (TReDS) have expanded dramatically. Their expansion and influence, however, have been constrained by a number of problems that they deal with. In the recent years, platforms for the Trade Receivables Discounting System (TReDS) have expanded dramatically. Their expansion and influence, however, have been constrained by a number of problems that they deal with. Issues involve not being a vendor-first platform, limitations on the kinds of anchors that may be onboarded, a lack of substantial incentives for anchors to utilize the platform, and a restriction on the types of financing options to banks alone.
The development of successful transaction finance solutions for their habitats by several new-age enterprises working with new-age lenders and financial services companies in India like ARTH has also gained traction, ensuring cash availability for respective stakeholders.
There is a need for a new financial platform to democratize transaction-based finance for all parties involved.
Model Being Suggested
In that vein, the new platform must function on a few key focuses: prioritizing MSMEs, expanding anchor coverage, obtaining funding from institutions and individuals, utilizing embedded finance using transactional data and recourse from anchors, and exploiting transaction data using GST e-invoicing.
Unlike the majority of the present platforms, the new platform should first feature transactions started by suppliers and largely driven to meet their financial needs. Apart from huge firms, it is crucial to make sure that additional sectors of the economy and different business sizes are included by the programme. The democratization of this product and, consequently, the total value chain will be impacted if the eligibility requirements for corporates are loosened to accommodate mid-sized corporates and rapid growth start-ups that may be losing money but have solid balance sheets.
The platform also has to accept funding from all lending institutions (banks and NBFCs), other investment firms (mutual funds, insurance companies, pension funds, small micro finance companies etc.), corporate bonds, including those issued by the anchor corporation itself, and retail investors. Lowering the hurdle for corporations and increasing liquidity by bringing on more financiers will provide suppliers access to greater money.
Moreover, anchors have the option to opt in and offer specific transaction-based information about their suppliers, their own financial information, and a strong remedy for making payments on time. Access to transaction data practically in real time may also be made possible via connections with the government’s e-invoicing portal.
To provide a seamless onboarding process for vendors, the platform should make use of the Account Aggregator architecture.
The Fine Print
The anchor will have first dibs on utilizing their corporate treasury to finance the deal under the proposed plan. This is done in an effort to entice the anchor to take part in the transaction. We think a big part of the reason for other platforms’ modest growth has been the anchor corporate’s lack of incentive. Nevertheless, this scenario is constrained by the cash provided by the anchor/treasury buyer’s team and can include a significant amount of lending partners.
When the anchor/buyer is unable to take part, the participating lenders can fund the invoices by placing a bid on it, allowing the vendor to pick the best offer and be paid for the transaction in full transparency. With the new platform’s features, the supply chain will see exponential value creation since suppliers and buyers will start using it more frequently.
Using technology to enhance the provision of financial services via micro enterprise financing was once fintech’s main goal. MSME Fintechs are now beginning to alter how individuals and companies interact with money, though. What fintech first provided and what it’s set to deliver in the following 10 years will drastically differ from one another. The latent potential of MSMEs is being recognised by the fintech sector, and it is looking into new possibilities to create solutions that might transform India’s small business sector.