Public Sector Banks Strengthen Ties with Fintech Startups to Boost MSME Financing
Public sector banks are exploring enhanced collaborations with fintech startups as they strive to bolster lending to micro, small, and medium-sized enterprises (MSMEs). This initiative aligns with the government’s recent budget proposals aimed at accelerating credit flow into the MSME sector and facilitating loans from the priority sector.
Alongside this trend, a decline in traditional loans to unbanked consumers has nudged banks to focus sharply on financing supply chains and providing loans against goods and term loans for enterprises, according to industry insiders. These shifts reveal a strategic pivot towards supporting MSMEs, which play a critical role in driving economic growth compared to consumer loans.
The Role of Fintech in MSME Financing
Pallavi Shrivastava, Co-founder of Progcap, a supply chain financing startup, emphasizes the vital function fintechs can play in enhancing customer outreach, offering essential digital infrastructure, and managing loan processes effectively. “The partnership dynamics around MSMEs are evolving from traditional co-lending models to more refined collaborations between public sector banks and fintechs,” she stated.
Fintech startups like Minintifo, backed by PayU, Vayana, and Peak XV, are enhancing their role in supply chain financing and trade financing. These companies often serve as crucial partners for major brands, equipment manufacturers, and small business retailers, helping to bridge financing gaps.
Shifting Approach to Small Business Financing
Access to banking services has long posed challenges for small businesses, compelling many to rely on local lenders or distributors for credit. However, improved fintech capabilities are enabling banks to adopt more inclusive approaches by using data from account aggregators or transaction processing systems, opening up new financing avenues for MSMEs.
Many banks are evaluating co-lending relationships with fintech partners, guided by frameworks approved by the Reserve Bank of India. This model allows banks to retain up to 80% of a loan on their books while permitting fintech partners to manage and underwrite the remaining 20% of the loan, mitigating risks associated with default.
Emerging Trends in MSME Financing Partnerships
With the increasing trend toward co-lending, industry experts like Kushal Rastogi, CEO of Knight Fintech, report that banks are actively pursuing financing opportunities across various domains, including commercial vehicle loans and property financing. While currently a smaller market segment, interest in supply chain financing among lenders is on the rise.
Navigating Challenges and Opportunities
Although lenders are eager to tap into the potential of the MSME sector, they face challenges in trust-building with vendors and suppliers regarding their repayment capabilities. Understanding the complexities of trade financing remains crucial for larger financial institutions, which have historically been hesitant in this domain.
Institutions like the State Bank of India and Union Bank of India are gradually recognizing the need for innovative solutions and deep technological integrations to succeed in this space. Ramaswamy Iyer, founder of Vayana, emphasizes that while public sector banks are interested in fintech partnerships for MSME lending and supply chain products, operational challenges could slow the expansion of co-lending in supply chain financing.
Conclusion
The burgeoning collaboration between public sector banks and fintech startups stands to revolutionize the landscape of MSME financing in India. As these partnerships evolve, they promise to unlock new opportunities for small businesses, driving economic growth while fostering innovation in the financial sector.