It is observed that small businesses remain insulated from global economic volatility and can consistently contribute towards growth and job creation. On the other hand, multinational corporates found themselves struggling to perform under fluctuating global economic and political conditions. This makes SMEs a dominant force in terms of revenue generation and job creation.
SME financing has been an issue for business owners. Especially because of the paperwork and compliances involved.
Fintech: A better alternative for traditional banks
SMEs need working capital to raise funds for expansion, operation, and maintenance of their manufacturing or service facilities. Lately, the bank credit to micro, small and medium enterprises had reduced considerably. The government has decided to implement some policy parameters ensuring that non-bank finance companies (NBFCs) and the fintech industry can play a significant role in SMEs Financing.
The government is planning to create a group of experts under the finance ministry of India to review the viability of engaging and encouraging fintech companies to finance SMEs. The group will also help to plan institutional development strategies and policies to boost the growth of fintech companies.
NBFC’s a better lending instrument for MUDRA
The Pradhan Mantri MYDRA Yojana provides the collateral free credit of up to Rs 1 million to SMEs. The government has realized that NBFC’s can be a very efficient mode of delivery of loans under MUDRA. Non-Banking finance companies recorded a four-fold increase in their credit books in the year 2017 in terms of SME lending.
The SME lending market grew at 13% CAGR in the five fiscals through 2017. Over fiscal years 2018 and 2019, the SME lending market is expected to grow at 11% CAGR. To address the requirement of a delivery of financial products of this expanding lending market growth, NBFC’s and Fintech serve as a viable alternative.
Finance Minister, Arun Jaitley informed about his intentions of using 12 types of NBFC’s in India to deliver loans to SMEs under MUDRA. He also envisioned to use data generated by the Goods and Services Tax(GST) to assess the risk associated with granting the loans to SMEs. Non-Performing assets in SME will be scrutinized thoroughly to make sure that the risk is avoided.
Proposal to bring data of public sector banks and corporates on Trade Electronic Receivable Discounting System (TReDS) and linking it with the Goods and Services Tax Network will enhance credit availability operations. GSTB will create a vast repository of information and it will be used to effectively address the issues related to non-performing assets and stressed accounts of SMEs.
Corporate tax benefits make SME stocks lucrative
The government has announced a major change in corporate taxation rules for SMEs. The SMEs with a turnover of less than Rs 250 crore in FY17 would be required to pay tax at 25 % instead of 30. The government has introduced a new section 112A in the Income Tax Act, 1961 under which imposed 10 % tax on Long-Term Capital Gains (LTCG) from equity shares and equity-oriented funds.
Reaction from business sector
Using technology to make credit process easier and efficient and addressing NPA’s in the SME sector delights the industry insiders. Reduction in corporate tax and advancement in digital lending through fintech will bring in more investments for SMEs. The industry insiders need to make the most of what is being offered to them.