By Pankaj Sharma
The role of fintech has deepened across sectors, and it is especially true for the Micro, Small, and Medium Enterprises (MSME) segment. It is changing the way financial services are delivered and consumed. From digital payments to peer-to-peer lending, financial services are powered by advanced tech like blockchain and AI, leading fintechs to offer accessible, efficient, and inclusive solutions to businesses – big or small. Fintech’s contribution to MSMEs’ empowerment will likely increase, with the Indian fintech sector predicted to reach $150 billion by 2025.
How are fintech solutions equipping MSMEs?
MSMEs are one of the critical pillars of the Indian economy, contributing approximately 29% to the GDP, 44% to the exports and employing over 123 million people. However, they often face challenges accessing traditional financial services, such as credit and insurance. While MSMEs have the potential to fuel the Indian economy, the industry faces a significant credit gap of Rs 25 trillion. There is an urgent need to double the credit disbursal rate to the MSME sector. Fintech is bridging this gap by offering tailored solutions that cater to the unique needs of MSMEs.
Fintech has improved access to credit. Traditional banks often hesitate to lend to MSMEs due to perceived risks and lack of credit history. To assess creditworthiness, fintech companies use alternative data sources, such as digital transactions, GST filings, and utility bills. This inclusive and data-driven approach has expanded the credit market for MSMEs, enabling them to secure the necessary funding for growth. According to a report by EY, digital lending is expected to reach Rs 47.4 lakh crore by 2026. This is a potential opportunity for MSMEs.
In addition to credit, fintech solutions have simplified transactions through digital payments. It has enabled MSMSEs to streamline receiving and sending money. This is majorly done by the widespread adoption of mobile wallets and payments like UPI and digital payment platforms. As per data by IBEF, digital payments in India have surged, with the Unified Payments Interface (UPI) processing over 10 billion transactions in a single month in 2023. This shift towards digital payments simplifies day-to-day transactional operations and enhances financial inclusion by providing direct financial access to underserved and unbanked MSMEs access to financial services.
Moreover, fintech tools like invoicing and expense management software have been a game-changer for MSMEs. They help manage cash flow more effectively. Automated invoicing and real-time expense tracking ensure that businesses clearly understand their financial health, allowing for better decision-making and strategic planning. The rise in digital adoption presents prospects for further growth in the sector, with 72% of MSME payments done through digital modes compared to 28% cash transactions.
Policy support fueling the growth of fintech and MSMEs
The Indian government and regulatory bodies are implementing policies to support integrating fintech solutions in the MSME sector. These policies create a conducive environment for fintech innovation while ensuring consumer protection and financial stability. One key initiative is the establishment of regulatory sandboxes that allow fintech companies to test their innovations in a controlled environment. This approach helps regulators understand the implications of new technologies and develop appropriate regulatory frameworks. The Reserve Bank of India’s (RBI) regulatory sandbox will facilitate the development of various fintech solutions tailored for MSMEs.
At the same time, the Indian government’s investment of Rs 14,903 crore between FY 2022 to FY 2026 in Digital India is a crucial step towards building digital infrastructure that supports fintech adoption. High-speed internet connectivity, digital identity systems like Aadhaar, and mobile penetration are critical enablers of fintech growth. These initiatives ensure that MSMEs can leverage fintech solutions seamlessly.
A significant policy support initiative is the RBI’s Payments Vision 2025. This plan aims to achieve a threefold increase in digital payment transactions, a 50% CAGR, and an increase in the registered customer base for mobile-based transactions. Additionally, the goal is to achieve a 150% increase in prepaid payment instrument (PPI) transactions and the expansion of card acceptance infrastructure to 25 million by 2025. These thoughtful measures will help build a robust digital payment infrastructure that will, in turn, benefit MSMEs and enhance financial inclusion.
Fintech growth and the expansion of MSME ecosystems
The future of fintech in the MSME sector in India looks promising, with several trends expected to shape its growth trajectory. Integrating AI and machine learning in fintech solutions will further enhance credit scoring models, fraud detection, and personalized financial services for MSMEs. These technologies will enable more accurate risk assessments and tailored financial products. Also, decentralized finance (DeFi) platforms could provide MSMEs access to a broader range of financial services without traditional intermediaries.
Moreover, embedded finance, where financial services are seamlessly integrated into non-financial platforms, is also gaining traction. MSMEs will benefit from embedded finance solutions that simplify access to credit, insurance, and payments within their existing business workflows.
Future outlook
India’s gradual transition to a mobile-first economy plays a significant role in the future of fintech. With smartphone users expected to reach approximately 1.1 billion by FY2026 and Internet users projected to exceed 850 million, the country has almost shifted towards a mobile-centric approach to financial services. This shift will further accelerate the adoption of fintech solutions among MSMEs, providing them with the tools and resources needed to thrive in a digital economy. As the nation works towards the vision of becoming a $5 trillion economy, the continued growth of MSMEs through fintech innovations is set to play a major role.
Pankaj Sharma is CEO of Religare Finvest Ltd. Views expressed are personal and do not reflect the official position or policy of FinancialExpress.com. Reproducing this content without permission is prohibited.
