Small and medium-sized businesses (SMBs) impact developing economies through job creation, credit offtake, and, perhaps most importantly, positive contributions to Gross Domestic Product (GDP).
In India, SMBs contribute about 30% of the country’s GDP, which is a significant amount – after all, India is likely to reach $4T GDP by the end of fiscal year 2024-2025. But while SMBs play a crucial role in propelling India’s rapid economic growth, they continue to operate within a disorganised sector and face numerous challenges.
As innovation weaves its intricate pattern across sectors, financial technology has emerged as a transformative force with the potential to reshape the fate of SMBs. This article will explore how alternative finance can help unlock global potential for small enterprises in India.
A Tapestry of Ambition
The story of Indian SMBs is one of ambition and ingenuity that spans industries. Collectively, the ecosystem hosts budding first-time business owners and legacy families struggling to expand their businesses beyond local markets. Common stumbling blocks include limited access to finance, regulatory hurdles, and lack of access to global markets.
As India’s ambition to become the world’s production house becomes a reality, SMBs will be at the forefront of a new industrial revolution.
How Fintechs Provide the Catalyst for Globalisation
Fintechs are powerful allies for SMBs in India. Driven by innovative, digitally native, and disruptive technologies, they break down traditional barriers and deliver global opportunities in five key ways.
1. Better Access to Global Markets
Small businesses typically need help to break into global markets. Trade regulations are difficult to understand and navigate, overseas shipping is complex, and financing can be challenging to set up – especially abroad. So, until recently, SMBs in India weren’t big players on the world stage.
However, growing internet availability in the country has given small business owners the power to access global markets online. At the same time, new fintech services have made it easier for SMBs to establish offshore businesses with local payment and collection options.
Because they offer cross-border payments, shipping and logistics advice, and trade finance solutions, fintechs fundamentally change the game. These platforms help small businesses with the tools they need to transact seamlessly with buyers and sellers in many countries.
The result? Small Indian companies can now scale and offer their products globally, which is very exciting.
2. Expanded Access to Credit
As mentioned earlier, SMBs contribute roughly 30% of India’s GDP and provide 40% of the country’s overall employment. However, small businesses often find it difficult to access INR capital.
As of September 2023, outstanding banking credit in India stood at roughly $1.8 trillion, out of which SMBs held only $289 billion – a mere 15% of the cumulative total.
According to a white paper by Avendus Capital last year, the total credit demand in the SMB category is roughly $819 billion, leaving smaller companies underserved to the tune of $530 billion. This is unfortunate because access to capital can be a lifeline for a budding business.
Traditionally, banks have been reluctant to extend credit to smaller enterprises, citing excessive risk or a lack of collateral. Meanwhile, with the support and guidance of the Reserve Bank of India, fintechs have developed alternative lending services that are accessible to a much broader range of clients.
Fintechs use alternative data sources, algorithms, and other machine learning (ML) techniques to assess creditworthiness. This new approach to lending is beginning to provide much-needed capital to fuel global expansion for Indian SMBs.
3. Optimised Processes and Workflows
Obvious challenges for SMBs include obtaining finance, navigating global supply chains, and dealing with – or obtaining – international bank accounts, but driving efficiency can also be a headache. Accounting software, invoicing tools, and other programmes collectively amount to a lot of money and take time to set up and perfect.
Today, various fintech platforms offer cloud-based accounting software, supply chain management platforms, and digital invoicing tools to help small business owners streamline operations. By automating tedious tasks and optimising workflows, these technologies help save time and allow SMB owners to focus on strategic growth.
4. Enhanced Risk Management and Compliance
Overseas expansion can be complicated. For a start, you must learn about compliance procedures and laws in other nations without being physically present in those countries. To navigate the intricacies of global trade, you then need to establish a robust yet flexible risk management and compliance framework.
Once again, fintech ecosystems give SMBs enterprise-level tools to help them stay compliant abroad. Solutions like KYC-AML buyer screening, credit report analytics, and automated invoice management tools – including robust debt collection processes – represent incredible value for Indian business owners looking to expand globally.
5. Improved Market Intelligence and Strategic Insights
In the hyper-competitive global marketplace, access to timely and accurate consumer intelligence is critical for small enterprises, helping them make informed decisions and stay ahead of the curve.
Fintech platforms leverage artificial intelligence (AI) and machine learning (ML) to analyse vast amounts of data. By doing this, they can provide small businesses with actionable insights related to marketplace trends, consumer behaviours, and competitive dynamics.
Overcoming the Challenges Ahead
Fintechs can solve many of the challenges Indian SMBs face on the road to becoming global businesses, but some will remain. Tackling those will require sustained capital, good governance, and inclusive new policies.
Solution 1: Supporting Digital Literacy and Skill Development
Delving into digital transformation, the India Digital SME Credit Report 2023 provides a comprehensive look at the evolving dynamics of micro, small, and medium enterprises (MSMEs). According to the report, only about eight million of India’s 64 million registered MSMEs are “digitally mature brands”, leaving a wide gap in the market for better digitisation.
With that in mind, it will be vital for MSME business owners and employees to learn the digital skills they need to harness the power of fintech for global growth – and soon.
Government initiatives, industry partnerships, and educational programs can play a crucial role in bridging the digital divide and empowering small enterprises. Recently, the Indian government announced several new skill-development training institutes, including the Tata GOI collaboration, which is encouraging.
Solution 2: Developing Regulatory Compliance and Legal Frameworks
Navigating the regulatory landscape, both domestically and internationally, can be daunting. To develop regulations that promote innovation in a legally robust way, government agencies, industry associations, and fintechs must work together.
Simplifying regulatory processes, providing guidance on international trade regulations, and offering incentives for compliance can make it much easier for SMBs to expand globally.
Solution 3: Improving Credit and Banking Access
Banking in India has gone through a revolution, becoming easy, reliable, and cost-effective, thanks partly to a series of government initiatives. But as Indian SMBs continue to scale their operations outside local markets and expand abroad, they also need better international banking and credit facilities.
In other jurisdictions, companies can struggle to open bank accounts and must meet with staff in person to prove their identities. Some business owners wait more than six months to open basic accounts, while others are turned down completely.
Fintechs overcome international barriers with alternative banking solutions. Many support transactional finance arrangements with standby letters of credit (SLOCs), letter of credit discounting, and other short-term financing services. These flexible options, plus localised account details, make it much easier for Indian SMBs to access markets abroad.
Solution 4: Strengthening Data Protection and Cybersecurity
As small enterprises “go digital” and embrace fintech solutions, information security and data protection become top priorities.
Investing in robust cybersecurity tools, implementing encryption protocols, and fostering a culture of security awareness are essential steps in safeguarding sensitive information and maintaining trust in global markets.
A Global Future for Indian SMBs
In the dynamic, interconnected world of global commerce, Indian SMBs stand at the threshold of unprecedented opportunity.
Fintech’s transformative potential will help businesses unlock new markets, meet overseas expansion goals, and thrive internationally. Legislative solutions, collaboration, innovation, and resilience can collectively reduce the impact of other challenges and enhance opportunities across the board.
With the support of fintech partners, policymakers, and industry stakeholders, Indian SMBs can chart a course toward growth, prosperity, and global impact.
Author: Anoop Nair
Anoop Nair, a fintech veteran with 20+ years’ of experience, is currently Country Head – India at Interpolitan Money. Leading global operations, he drives innovation in digital banking, payments, and remittance solutions. Formerly Head of NBFI Coverage at Barclays, Anoop excelled in relationship management and corporate finance, enhancing Barclays’ growth and reputation in India.