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. * * * 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 extent, financial technology ( or fintech1 ) 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 output2. 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. 1 / 5 bis central bankers'speeches 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 tenor