Credit and Finance for MSMEs: The dilemma of lack of credit for India’s humongous base of micro, tiny, 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 regardless of the country’s whole credit machinery like banks, non-banking economic organizations, microfinance institutions, and new-age fintech lenders jointly and actively catering to the working capital needs of tiny corporations. 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 general Rs 94.97 lakh crore gross bank credit deployed in January 2021, as per information from the Reserve Bank of India.
What’s clear right here is that there are several properly-performing tiny corporations, which could not have a national profile, out of the lending ecosystem. Capital crunch is the greatest challenge for Indian MSMEs as several 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 higher-threat corporations in India, could there be an investor class with an nearly organic higher-threat appetite coupled with a international outlook to back such assets? Experts think crypto investors may well be the answer to that query.
“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 TheSpuzz Online.
On the investor side, the government should really allow retail investors to participate in each and every economic supplying 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 economic inclusion is holding the general economy as properly and not just MSMEs. The foreign crypto investment could ease the challenge. To place this in viewpoint, we can look at China that does not look at cryptocurrency as a legal tender neither its banks acknowledge them, but all the prime 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 TheSpuzz Online.
Importantly, the feel tank for the Indian software program items business iSPIRT had argued this topic — of acquiring the threat-tolerant digital capital — in a weblog 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 about the world, and there are at least fifty crypto protocols valued at more than $1 billion…India could supply a viable path to deploy this new crypto wealth in a controlled manner even though solving for SME economic inclusion.
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For this to take place, 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 weblog along with startup investor Krishna V Iyer, Coinbase India Head Pankaj Gupta, iSPIRT Co-founder Sharad Sharma, fintech specialist Sanjay Phadke, and Siddharth Shetty, told TheSpuzz 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, performs as an open API for loans to let 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,” stated Jain.
There are several prospective strategies to construct 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 by means of an ECB sort 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 also would have to adopt blockchain technologies 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 TheSpuzz Online.
Nonetheless, fundraising has normally been one of the important use instances for crypto. Generally, it requires significantly less time to participate in a token supplying than in an initial public supplying 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.
The ideas/suggestions about cryptocurrencies in this story are by the respective commentator. TheSpuzz Online does not bear any duty for their guidance. Please seek advice from your economic advisor prior to dealing/investing in cryptocurrencies.