How Financial Inclusion Reshapes the MSME Landscape

Financial inclusion is a method of offering financial services accessible and affordable to individuals, especially those who are usually excluded, such as low-income individuals, rural communities, and small businesses. It strives to remove the barriers that exclude people from participating in the financial sector and using these services to improve their lives.

Financial inclusion is increasingly being recognized as a key driver of economic growth and poverty alleviation the world over. Access to formal finance can boost job creation, reduce vulnerability to economic shocks and increase investments in human capital. Without adequate access to formal financial services, individuals and firms need to rely on their own limited resources or rely on costly informal sources of finance to meet their financial needs and pursue growth opportunities. At a macro level, greater financial inclusion can support sustainable and inclusive socio-economic growth for all.

Financial services often fail to cater to the underserved market due to several barriers. Traditional financial institutions tend to focus on urban areas and affluent customers, leaving low-income individuals, rural communities, and small businesses with limited access. This exclusion happens for various reasons such as economic barrier, informational barrier, technological barrier. In response to these barriers, there has been a rise in digital financial services targeting the underserved market in India.

Financial inclusion plays a significant role in transforming the landscape for Micro, Small, and Medium Enterprises (MSMEs) by enabling them to reach a global audience and compete more effectively with larger enterprises. The MSME sector has notably increased its adoption of digital platforms and payments, particularly after the global COVID-19 pandemic in 2020. According to a recent India Brand Equity Foundation (IBEF) report, more than 71% of the MSME payments are now made online through digital technology and net banking in their day-to-day operations.

The primary challenge for MSMEs in securing financing is the lack of a ‘credit history’. Financial inclusion addresses this issue by providing access to various financial services and tools that help build their creditworthiness. By bringing MSMEs into the formal banking system, they can open bank accounts, make digital transactions, maintain financial records, and create a documented financial history, which are basic essentials for common people to sustain themselves in this era. Initiatives like Pradhan Mantri Jan Dhan Yojana (PMJDY), launched in 2014, have facilitated the opening of millions of bank accounts for MSMEs, especially in rural areas, ensuring access to financial services for all, including basic savings and deposit accounts, remittance, credit, insurance, and pension facilities in an affordable manner.

Considering the access to capital remains a significant hurdle, one of the biggest challenges that MSMEs face is obtaining loans. Traditional banks often demand substantial collateral and impose strict lending criteria, which makes it difficult for small businesses to secure loans. Financial inclusion initiatives, such as microfinance, government schemes, and digital lending platforms, have mitigated this issue by offering alternative funding sources.

The rise of fintech has further enhanced financial inclusion for MSMEs in India India boasts over 1,300 FinTech start-ups and has secured the second position in the global FinTech adoption index.FinTech companies are gradually making their presence felt by leveraging technology to extend financial services to the underbanked segments of the population.Digital payment platforms, mobile banking, and online lending services have simplified financial transactions, through mobile banking platforms and apps.
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Open Network for Digital Commerce (ONDC) is a platform introduced to promote digital inclusion, help small and medium businesses create innovative digital commerce applications and services by leveraging open APIs, interoperability and open-source technologies. Additionally, Grameen Foundation for social impact, a non-profit organization is also facilitating special skilled sellers such as craftsmen, artisans and weavers onboarding onto the ONDC platform, further expanding its reach and impact.

These efforts not only support the sustainability and expansion of small businesses but also contribute to broader economic development and inclusion, particularly in rural and underserved areas. As financial inclusion continues to advance, MSMEs are better positioned to thrive, fostering a more dynamic and equitable economic environment.

(Nilay Patel, Founder & MD of Easy Pay)