S S Mundra: Financing MSMEs: Banks & FinTechs - competition,
collaboration or competitive collaboration?
Inaugural address by Mr S S Mundra, Deputy Governor of the Reserve Bank of India, at the
NAMCABS Seminar organized by College of Agricultural Banking, Mumbai, 20 February 2017.
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1. Mr. Simon Bell, Global lead, SME Finance, World Bank Group; Smt. Surekha Marandi,
Executive Director, Reserve Bank of India; Shri P. K. Panda, Principal, College of Agricultural
Banking(CAB); Chairmen/CEOs of various banks present here; other senior officers from the
banking sector; my colleagues from RBI; ladies and gentlemen! At the outset, let me
congratulate CAB for organising this Seminar on the theme of "Coping with the challenges of
Financial Technology Innovations in MSME Financing". I particularly take this opportunity to
welcome Mr. Simon Bell to India and thank him profusely for consenting to address the
participants this morning.
2. I think the seminar theme is very topical especially in the backdrop of a public policy push
towards digitisation of finance in all its manifestations. MSME sector, which accounts for more
than half of the world's gross domestic product (GDP) and employs almost two-thirds of the
global work force, is virtually the backbone of the global economy. Hence, the sector needs to
benefit from the fintech innovations to keep the global growth engine chugging along.
3. The seminar theme precludes the discussion on 'whether' and 'how' financial technology
innovations can be employed for financing of MSMEs and takes it as a given. Certainly to a large
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extent, financial technology (or FinTech ) innovations have permeated across the entire Financial
Services Value Chain. So, whether it is wholesale banking, wholesale payments, retail and
commercial banking, customer relationship or payment services, FinTech finds applications
across the spectrum. What we are set to discuss today is, thus, only a segment of this value
chain i.e. use of fintech for financing of MSMEs. Nevertheless, the challenges of financial
technology innovations in Finance would be generally common to the entire value chain.
4. In the context of MSME Financing, I have been asked to speak on the topic 'A new business
model for the next decade: collaboration with the fintech companies'. All of you would
agree that technology has been in use in banking and more generally in the sphere of finance for
quite some time now -whether it is use of computers for book-keeping, products like credit and
debit cards or use of ATM for delivery of services etc., all were fintech innovations in their time.
But when we talk of fintech in today's context, we generally mean innovations which have
enabled Big Data Analytics, Algorithmic trading and applications of Block Chain Technology and
their variants. In my address today, I intend to focus on the financial technology innovations and
emerging collaboration opportunities for the banks with Fintech players for MSME financing.
Financial technology innovations in MSME financing
5. With around 51.1 million units throughout the geographical expanse of the country, MSMEs
contribute around 8% of GDP, 40% of the total exports and around 45% of the manufacturing
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output . They are also estimated to provide employment to around 120 million persons in the
country. Moreover these figures may not be capturing contribution of MSMEs in services sector
fully. As per the International Financial Corporation (IFC), a 'funding gap' of $ 2.1 to 2.6 trillion
exists for all formal and informal MSMEs in emerging markets alone, which is equivalent to 30 to
36 per cent of current outstanding MSME credit. SME lending being a hugely underserved market
is a major opportunity for FinTech Start-ups to build and scale up sustainable businesses by
offering services such as credit underwriting, marketplace lending, etc.
6. Given the huge business potential the number of FinTech companies in the MSME Financing
space has been growing rapidly. FinTech companies are improving access to finance for SMEs
by giving loans themselves, connecting SMEs to banks and financial institutions (Marketplace
Model) (e.g. Lendingkart, smelending.com, etc.) or becoming financial product aggregators (e.g.
BankBazaar, bookmyforex.com, PolicyBazaar, FundsIndia.com, etc).
7. The fintech companies have leveraged on growing technological advances and pervasiveness
of smartphones and have targeted niches in SME lending to bridge the funding gap for small
businesses with innovative and flexible credit products. Potentially, the MSME borrowers can
apply online in minutes, select desired repayment terms and receive funds in their bank accounts
within 2-3 days with minimal hassle. There are few documentation requirements, very quick
turnaround time and flexible loan sizes and tenors. That the P2P lenders can become a
significant source of finance for the small borrowers is evident from the UK example where the
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P2P lending represents about 14% of the new lending to the SMEs. A NESTA survey in the UK
suggests that around 55-60% of peer-to-peer business borrowers were either refused bank
credit or they had not approached banks considering they were not credit worthy enough.
Though, corresponding data is not available for India, I believe the position in respect of refusal of
credit to potential borrowers may be more acute. FinTech lending companies and the market
place based lending, thus, have an underlying potential to emerge as an alternative source of
finance for the small businesses. Considering the need to strike a balance between regulation of
these entities even while preserving their ability to innovate, RBI is currently consulting on
approach to regulate the P2P lending.
8. As I said earlier, the fintech firms are powered by technologies that harness big data analytics
& machine learning and use a mix of traditional and non-traditional methods to assess the credit
worthiness of individuals and SMEs. These firms are also willing to lend to small businesses that
might not have collateral, significant revenues or years of experience. Many of the fintech firms
abroad employ unorthodox techniques, including psychometric tests to run checks on their
borrowers, determine their social media reputation and do rigorous due diligence before lending.
This provides an inherent advantage to them over the traditional lenders in gauging the
creditworthiness of the potential borrower/business.
9. With the combination of data and analytics, it is possible now to do credit risk analysis online,
complete loan appraisal and disbursal faster. A key reason why algorithm-based automated
lending by FinTech firms is possible today, unlike say 5-7 years ago, is the availability of reliable
data on potential borrowers. On the back of strong growth in internet penetration and mobile
density, e-commerce and smartphone-based services have created a huge amount of data on
individuals and small businesses. The availability of records from credit bureaus, utility and credit
card bill payments etc., has enabled the FinTech firms to sift through large volume of available
information and gather specific data on potential borrowers. As more and more data is getting
digitized, the cost and effort involved in assessing the creditworthiness of SMEs would decline
significantly. The borrowers can give their 'consent' to a FinTech lender or to a bank to use their
digital footprint for sanctioning a loan. This is already evident in the pre-approved loans that are
being offered to retail borrowers.
Why are we talking about bank's collaboration with Fintech companies?
10. Fintech companies as we have seen are disrupting every facet of the traditional financial
services business and have emerged as a challenge to the banking system. According to a PwC
2016 Global Fintech Survey report, up to 28% of the banking and payments business are at risk
by 2020. The imminent competition to banks' business comes from the new breed of fintech
companies having capacities to address specific pain-points of financial customers such as
remittance, credit, savings, etc. The report adds that MSME banking is likely to be the fourth
largest sector to be disrupted by Fintech in the next 5 years after consumer banking, payments,
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and investment/wealth management. Another study done by Citi researchers predicted that the
fintech revolution will wipe out nearly a third of all the employees at traditional banks in the next 10
years. This prediction is essentially about the lack of growth and loss of business over time,
though it may be difficult at this juncture to accurately gauge the possibility of any particular
benefit or risk materialising in the fintech universe.
11. In view of the above challenges that the fintech companies may present, it seems to make
business sense for the brick and mortar banks to collaborate with the more efficient and agile
fintech players. The banks would need to assess the likely impact of disruption and re-orient their
business models. As the incumbents, they may need to leverage their comparative advantage to
improve their customer relationships, change their internal processes, mindset, and internal
structures. Some banks have already adopted the ways of the fintech companies by employing
technology for making credit-decisions in a limited way. Many have started using credit scoring
models for retail and SME borrowers. What still eludes them is the nimble-footedness of the
fintech players, which alienates the potential borrowers.
12. Fintech firms are good at innovative skills and mindsets supported by the regulatory freedom
presently available to be innovative, to leverage Big Data and to be nimble in responding to
market changes. However, as this segment grows in size, they would sure be coming under
equivalent regulatory framework. Moreover, majority of them are venture capital supported
entities, which can't exactly substitute a wide capital base. This is where the banks could
capitalise on the fintech ecosystem. The banks could as well leverage big data, data analytics,
SME friendly applications, etc., in effectively lending to MSME segment while remaining compliant
with extant KYC norms and appraisal & monitoring principles and reduce their intermediation and
compliance costs. Whether to do so inhouse or through a collaboration is a business judgement
that individual banks need to make.
13. Despite some inherent advantages that the fintech players enjoy, it is not a one way street for
them. The fintech companies do not have a big client base of their own and without the expertise
to navigate the regulations and licensing discipline of the finance industry; they can't go very far
on their own. A major strength that traditional banks possess is a reputation for trustworthiness
built over several decades. The banks have capital and can weather intense competition. They
also have the benefit of experience and tried-and-tested infrastructure alongside specific financial
knowledge of risk management, local regulations and compliance. In fact, banks' on-the-ground
market and customer knowledge and pre-existing client base can be of immense value to fintech
projects. In a nutshell, banks and fintech firms have different comparative advantages and a
strategic collaborative partnership between the two would liberate them to focus on their
respective core competencies and contribute to the innovation process.
14. Let me now highlight few recent tech-enabled initiatives which have been blessed by RBI for
promoting accessibility of finance to the MSME sector.
Some RBI initiatives
15. RBI has initiated measures to expand the reach of banking services for unbanked population,
regulating an efficient electronic payment system and providing alternative options to the MSME
sector. Before I conclude let me focus on couple of recent tech-based initiatives launched by the
RBI for benefit of the MSME ecosystem.
(i) TReDS: In order to solve the problem of delayed payment to MSMEs, RBI has licensed three
entities for operating the Trade Receivables Discounting System (TReDS). The objective is to
create Electronic Bill Factoring Exchanges which could electronically accept and settle bills so
that MSMEs could encash their receivables without delay. The system would facilitate the
financing of trade receivables of MSME enterprises from corporate and other buyers, including
government departments and public sector undertakings (PSUs) through multiple financiers. It is
expected that the TReDS will commence operations within this current fiscal.
(ii) An Udyami Mitra portal has been set up to leverage IT architecture of Stand-Up Mitra portal
which aims at instilling ease of access to MSMEs' financial and non-financial service needs. The
Portal, as a virtual market place endeavours to provide 'End to End' solutions not only for credit
delivery but also for the host of credit-plus services by way of hand holding support, application
tracking, multiple interface with stakeholders (i.e. banks, service providers, applicants).
(iii) Payment Banks/ Small Finance Banks (SFBs): Following the issuance of differentiated
banking licenses, a number of such entities have become/ will shortly become operational.
These banks will have the advantage of embracing state of art technology from beginning.
Payment banks can't lend directly but can be distributors of the credit products, while SFBs
would predominantly be in MSME space. This throws open meaningful oppurtunities for
emergence of two-way/ three-way alliances between legacy bankers/ new banking entrants &
fintech companies in the area of MSME financing. Key would be who develops a clear vision &
moves fast.
Conclusion
16. Let me utilise the presence of the bank CEOs and in-charges of MSME divisions to draw their
attention to the need for focussing separately on 'micro' customers from amongst the MSME
segment. Micro entities comprise a very 'niche' segment as these are mostly individual or family
run businesses having very unique credit needs. As they generally lack adequate documentation,
they fail to receive credit from the formal financial system. An estimate suggests that at present
almost 93% of such units are outside the formal credit system. I think this segment, including the
small enterprises, can benefit immensely from the collaboration between banks and the fintech
players whereby their other payment records can form a basis for working their credit
worthiness.
17. A related aspect I want to highlight is that the smaller players in the MSME segment typically
dealt in cash despite having a bank account. Thanks however to the withdrawal of the SBNs
recently, most of them have begun to route their transactions through their bank accounts. It
opens up a huge opportunity for the banks to employ data mining techniques and utilize the
outcomes to assess credit needs of the small entrepreneurs. Needless to add that such
exercise has to be supplemented with financial literacy efforts - for ensuring that borrowers
utilize the credit for productive purpose & also don't retreat to cash dealings.
18. In fact, my vision of a fin-tech enabled banking system is one in which a micro entrepreneur
receives an online bank credit early in the morning, which she utilizes for buying her wares from
the wholesale market, sells them during the day, receives payment from customers in electronic
form (mobile money), pays back the bank loan at the end of the day and gets the surplus credited
to her linked savings account. Part of this saving when pooled, automatically moves to some
micro investment/ pension products. I strongly feel that a harmonious collaboration between
fintech firms and the banks can quickly help realize this vision.
19. Let me conclude by reiterating that the age of FinTechs is here and for the incumbent banks
there is no time to lose. The banks that do not quickly convert in to a new-age digital bank run the
risk of becoming history. They would need to tap the requisite talent and create an environment
where such talent can innovate and be agile. The banks must view the success of fintech
ecosystem as an opportunity and not as a threat.
I once again thank CAB for inviting me here and wish the Conference all success.
Thank you!
and institutions and the provision of financial services.
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msme.gov.in/sites/default/files/Background%20Note%20-%20UAM_0.pdf
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"The Promise of FinTech-Something new under the Sun?"- Speech delivered by Mark Carney, Governor, Bank of
England at Deutsche Bundesbank G20 Conference in Wiesbaden.
4
svicenter.com/how-big-banks-are-embracing-the-fintech-revolution-and-more-news