RBI Asks Banks, FinTechs To Play Nice, Cater To Under-Served MSME Sector
Innovative and nimble, financial technology companies, or fintechs, are often seen as challengers to the incumbent universal banks. But, the Reserve Bank of India (RBI) is calling for collaboration between the two to cater to grossly under-served and credit-starved micro and small enterprises (MSME).
Speaking at the College of Agricultural Banking today, RBI deputy governor SS Mundra urged banks to work with fintech companies to service ‘micro’ institutions in particular, a niche within the overall MSME segment.
An estimate suggests that at present almost 93 percent of such (micro) 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 (out) their credit worthiness.SS Mundra, Deputy Governor, RBI
Loans to MSMEs fall under the 40 percent priority sector lending target that the RBI has stipulated for domestic scheduled commercial banks and foreign banks with over 20 branches. Under the overall target, 7.5 percent of credit must be allocated towards micro enterprises by March 2017.
According to information provided by the Ministry of Micro Small Medium Enterprises, these entities, numbered at 5.1 crore, contribute 8 percent of India’s gross domestic product, 40 percent of exports, and 45 percent of manufacturing output. Highlighting the need for credit to these enterprises, Mundra, citing a report by International Financial Corporation, said a funding gap of $2.1-2.6 trillion exists for all formal and informal MSMEs in emerging markets.
A Boon From Demonetisation
A major challenge in lending to these enterprises has been the lack of any data to determine credit worthiness. This may improve after demonetisation. The withdrawal of Rs 500 and Rs 1,000 notes has nudged several MSMEs that dealt primarily in cash to route their transactions through their bank accounts, said Mundra.
Alluding to the global practice of using big data by financial technology companies, Mundra said this was a “huge opportunity” for banks to employ data mining techniques and use the outcomes to assess the credit needs of these enterprises.
My vision of a fintech-enabled banking system is one in which a micro entrepreneur receives an online bank credit early in the morning, which she utilises for buying her wares from the wholesale market, sells them during the day, receives payment from customers in electronic form, pays back the bank loan at the end of the day and gets the surplus credited to her linked savings account.SS Mundra, Deputy Governor, RBI
The challenge posed by financial technology companies in the payments space has forced several banks to scramble to put in place their own digital payment options. Banks’ lending business, though, remains largely unchallenged due to its scale and the access to deposits, which only banks have.
Mundra concluded by cautioning banks that in the “age of fintechs”, banks that did not adapt would “run the risk of becoming history”. Banks, he said, must view the success of the fintech ecosystem as an opportunity and not a threat.