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This article is more than 2 month old.

Amid fintech offerings in lending space, are merchants' savings taking a hit?

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Small businesses have traditionally faced significant challenges in accessing bank financing due to their business models and lack of proper documentation. The COVID-19 pandemic has further added to their woes, creating more economic uncertainties.

Amid fintech offerings in lending space, are merchants' savings taking a hit?
Small businesses have traditionally faced significant challenges in accessing bank financing due to their business models and lack of proper documentation. The COVID-19 pandemic has further added to their woes, creating more economic uncertainties.
Amid the uncertainties on keeping their businesses afloat, proprietors took drastic measures as their revenues plummeted. Many had to dig into their own pockets to ensure business continuity. In Britain, 14 percent of SME owners used their savings for immediate financial support during the pandemic. Recognizing this reality, the US and the UK governments offered income support to self-employed individuals made vulnerable by the lockdowns.
Let’s look at India. As the backbone of India’s economic structure, SMEs and MSMEs have been relentlessly safeguarding it by providing resilience to ward off global financial distress and adversities. With around 63.4 million business units operating throughout the geographical expanse of the country, MSMEs contribute to approximately 6.11 percent of the manufacturing GDP and 24.63 percent of the GDP from service activities. They also employ around 120 million people and contribute to about 45 percent of the overall exports from the country. And the pandemic wreaked havoc on this segment. In India, it became an acute problem because nearly 50 percent of the country’s workforce is self-employed, and over 95 percent of the workers are in the unorganized sector.
For them, the COVID-19 outbreak was a Black Swan event that caught them off-guard. While events like Covid 19 are one-off and rare, the challenges faced by SMEs on managing finances are not! And almost everybody seems to think credit is the panacea, virtually nobody is talking about the need to save! We seem to be forgetting it is our high savings cushion that helped India tide over multiple global financial crises. Even today India's Gross Savings (2020at 30 percent is almost 5 percent higher than the global average. Why should we not help SMEs adopt some discipline around savings?
Personal savings can help SMEs conduct uninterrupted business operations
In an environment where liquidity is tight, SME owners usually rely on debt financing, borrowing from friends, banks, and sometimes even resort to expensive options. However, the key to setting up a sustainable SME business is to gather funds from suitable sources at each growth stage. For instance, debt can be good for a company only when it has been running steadily for some time. Financing a new business through borrowed funds can be tricky -- unforeseen expenses could derail even the best-laid plans. And, when that happens, failing to repay the loan will cause irreparable damage to the financial reputation of the business owner. Maintaining a disciplined savings habit can give the business a cash reserve to steer through tough times and even drive growth once the environment is conducive.
Fintechs teaming up with banks to ease daily deposit practice for SME owners
I tried to Google “SME financial services in India” but all that came back was articles on lending and credit. More surprisingly when I changed my search to “SME deposits in India” the results were hardly different (mostly lending and credit). So much noise around SME lending makes it feel like SME Savings is irrelevant or completely forgotten. However, SME savings is not dead for sure. Fortunately, some non-traditional approaches like Commitment savings products, Pigmy Deposit Scheme, etc., have been helping small traders and merchants inculcate saving habits for more than a decade to fund their bigger capital requirements.
The iconic “Pigmy deposit scheme" designed by TMA Pai at Syndicate Bank was probably the first “business correspondent" model in the country. Every day, field agents/ runners collected small amounts (as small as Rs 50) from the doorsteps of their customers, including street vendors, laborer’s, village traders, etc.
Post the merger between Syndicate and Canara Bank, the scheme was named Nitya Nidhi Deposit (NND) Scheme. SME owners and individual merchants can rely on this scheme to deposit small amounts (as low as Rs 50) daily and fall back on this pool when they need lump sum capital funds to achieve their financial aspirations. While the scheme runs for 63 months, SME owners have the option of premature closure in case of emergency and they can also avail of loans up to 75 percent of the outstanding balance.
While some PSUs, India Post, and a few Cooperative banks are successfully running daily deposit schemes in their own way, new-age fintech players are also joining the bandwagon to help SMEs strengthen their finances. One such avenue is the Merchants Payment Platform, where merchants (SMEs) can not only collect payments from customers but also push a small part of their daily collections towards a fixed/recurring deposit. . Welcome to the new age of disciplined savings and Sachet Deposits.
For instance, typically, in a Merchant Payments platform, an SME merchant gets paid on the next day (basis the transactions happened during the day through digital payments, the monies get credited into the merchants’ bank account the next day). Through the payment platform, merchants can identify a part of their daily settlements and transfer it into a Fixed Deposit account. A shopkeeper may decide to lock in 2 percent of this daily business into an FD account instead of a Current Account. This amount becomes a part of his savings.
Small merchants and traders can make this practice an inherent part of their daily business and utilize the funds later without relying on expensive credit to meet big-ticket needs. Moreover, the fintechs would be more than happy to extend credit against these deposits once a trend is established. Voila, a new age payment platform solving for payment acceptance, merchant savings and merchant credit (without incurring the Pigmy/runner boy’s cost!). It’s not for no reason that merchant payment platforms have been the most proven door opener and a growth partner for the SME segment.
Fintech players have introduced positive changes, empowering small businesses to operate seamlessly, not just by giving them easy access to credit but also by helping them keep their finance game strong. By taking advantage of new technologies to inculcate the habit of savings and eliminating the stress of unnecessary debt, SME owners can channel their energies towards their business growth and generating revenues even when times are unfavourable.
The author, Raman Khanduja, is Co- Founder and CEO at Mintoak. The views expressed are personal
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