Credit and Finance for MSMEs: The problem of lack of credit for India’s humongous base of micro, small, and medium enterprises (MSMEs) has seemed to be unending so far. For the uninitiated, the credit gap for MSMEs in India is estimated to be a whopping $380 billion, as per the World Bank. This is despite the country’s entire credit machinery including banks, non-banking financial companies, microfinance institutions, and new-age fintech lenders jointly and actively catering to the working capital requirements of small businesses. Of Rs 95.69 lakh crore gross bank credit outstanding as of February 26, 2020, the share of MSE lending stood at only 11.8 per cent, down from 12.09 per cent share in the overall Rs 94.97 lakh crore gross bank credit deployed in January 2021, as per data from the Reserve Bank of India.
What’s obvious here is that there are many well-performing small businesses, which might not have a national profile, out of the lending ecosystem. Capital crunch is the biggest challenge for Indian MSMEs as many of them either lack or have no physical assets to pledge as collateral for bank loans that continue to be the go-to channel for credit. To back such high-risk businesses in India, could there be an investor class with an almost natural high-risk appetite coupled with a global outlook to back such assets? Experts believe crypto investors may be the answer to that question.
“There is a fundamental shift happening between private and public equities that is fueled by blockchain technology and evolving regulatory environment. India should democratise private investing and work on providing value propositions of crowd financing to SMEs, while simultaneously growing a robust community of retail investors passionate to support the companies of tomorrow. Basically, the Indian government needs to create a framework for SMEs to apply for crowd financing through initial tokenised equities offering to the public on a crowd financing investment platform,” Hitesh Malviya, Founder, itsblockchain.com told Financial Express Online.
On the investor side, the government should enable retail investors to participate in every financial offering launched on a crypto platform. “There are a couple of ways to filter out participants from masses, one of them is creating a lottery-based auction. For example, if a company is raising Rs 10 lacs through crowd financing, then a fixed limit on both investment per person, and a number of participants can be applied using a lottery-based auction,” Malviya added.
The prevailing gap in financial inclusion is holding the overall economy as well and not just MSMEs. The foreign crypto investment could ease the challenge. To put this in perspective, we can look at China that doesn’t look at cryptocurrency as a legal tender neither its banks acknowledge them, yet all the top crypto giants on NASDAQ draw their investments from Chinese investors. “The reason for that is businesses and investors wish to cut a slice in the crypto industry which has grown into a billion-dollar economy within a short span of time. Crypto giants have grown bigger than the tech giants that we have in India today. Now if India gives a green signal, all this investment can easily be welcomed into our economy. And a strong infusion of foreign investment can be used to satiate the financial needs of MSMEs,” Kumar Gaurav, Founder & CEO at crypto-friendly neo bank Cashaa told Financial Express Online.
Importantly, the think tank for the Indian software products industry iSPIRT had argued this subject — of getting the risk-tolerant digital capital — in a blog post in April this year: The 10-year old crypto economy is now worth trillions of dollars. There are more than a hundred million crypto holders around the world, and there are at least fifty crypto protocols valued at over $1 billion…India could offer a viable path to deploy this new crypto wealth in a controlled manner while solving for SME financial inclusion.
For this to happen, according to iSPIRT, “Inflows of cryptocurrencies from KYC-ed investors through approved Indian and global exchanges can potentially be allowed into India for the purposes of enhancing SME access to low-cost global capital. GST-registered companies could, for instance, receive capital against their issued e-invoices and other information collateral in special accounts opened via a controlled conduit such as GIFT city, which is one of India’s favored bridges to international markets.”
Bharat Innovation Fund Partner and Chief Innovation Officer and CIIE (IIM Ahmedabad) Sanjay Jain, who co-authored this blog along with startup investor Krishna V Iyer, Coinbase India Head Pankaj Gupta, iSPIRT Co-founder Sharad Sharma, fintech expert Sanjay Phadke, and Siddharth Shetty, told Financial Express Online that Open Credit Enablement Network (OCEN) could be a mechanism based on which crypto investment can flow into MSMEs. OCEN, announced by Nandan Nilekani in July last year, works as an open API for loans to allow loan service providers to connect with banks and non-banking lenders to digitize origination, underwriting, and servicing of a loan.
“You can have lenders and borrowers hooked up to the OCEN network for the credit low. Now the question comes is where you would convert crypto, how you would convert it etc. So, we said that maybe it can be ringfenced in some kind of a structure because you don’t want MSMEs to return capital in crypto and so you need to have a bridge in between to do that,” said Jain.
There are many potential ways to build that bridge. According to Jain, one could be an NBFC or bank that can take crypto investments as a sort of external borrowing and bridge it to India through an ECB kind of a route or there could be an AIF structure. “There are enough ways to put an entity in between to allow the fund flows and for KYC and other regulatory aspects to be managed. Since crypto is still not an option in India, we are trying to find the best way to do it and propose this thought to the government in a more concrete way.”
Importantly, banks too would have to adopt blockchain technology to facilitate crypto investments. “The only possible challenge that I see in the prevailing banking structure. This hurdle also plays a role in the state of financial inclusion in the country. To enable a faster penetration into the sectors, to be able to ensure the right diversion of funds and proper execution we need a finer system. If the banking sector embraces blockchain technology, this can be addressed with ease,” a prominent crypto investor told Financial Express Online.
Nonetheless, fundraising has always been one of the key use cases for crypto. Generally, it takes less time to participate in a token offering than in an initial public offering of any stock. “Anyone with valid KYC documents can participate in a promising startup along with venture capitalists, that’s the beauty of fundraising through a crypto offering. That’s what is happening in the industry for the last few years,” added Malviya.
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