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The Pattern #30: Can FinTechs survive the winter as banks make inroads into MSMEs?

Mayank Jain   /    Head - Marketing and Content    /    2022-10-07

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    Hello everyone!

    Welcome to the 30th edition of The Pattern, a weekly newsletter where we break down the rumblings from the world of finance, technology, and economy. There’s a lot to unpack this week so let’s dive right in. 

    MSMEs find their way to formal credit

    First, some good news. Credit to the MSME segment in the country has improved over the last year, RBI data showed. Disbursements rose 23% in 2021-2022, and last year, priority sector lending to the sector rose 5% year on year, according to the RBI

    This is coupled with a rise in the private sector’s share in MSME lending, which has risen to 51% of all disbursements for the micro sector and 69% for the larger small and medium enterprises. 

    This is but a drop in the ocean in closing the Rs 25 trillion funding gap, as the parliamentary standing committee estimated. But it’s progress nonetheless. 

    India’s Chief Economic Advisor has already said that OCEN and Account Aggregator-driven origination can unlock Rs 3 trillion lending to the MSME sector. Recent developments show that it might be coming true. 

    Interestingly, there’s also another dynamic at play - that of digitization. As most lenders bet on increasing digitization of the MSMEs to deliver credit at a lower marginal cost of origination, it might also be the case that credit availability can boost digitization velocity for the MSME sector in the country. 

    Our CEO Rajat wrote about it in detail in his newsletter yesterday. You can read that piece here

    Webinar announcement: On the subject of MSME credit and the big opportunity it presents for FinTechs, lenders, and startups alike, we’re organizing a webinar this month. Our CEO Rajat Deshpande will converse with Arihant Jain, Head - Data Science at IIFL, and Kushal Kothari, Head- Credit Products at Vyapar. You can reserve your spot here

    India Inc finds firmer footing 

    The good news doesn’t just stop at the MSME sector. It turns out that India Inc has also steadily seen an improvement in its overall performance. Credit ratio, the ratio of upgrades to downgrades in credit ratings, jumped to 5.52 in the first six months of FY23 compared to the previous period, the latest data by Crisil reveals

    This is undoubtedly a positive sign of greenshoots when the global economy faces headwinds and is mired in talk of a looming recession or worse. 

    The sectors doing well are spaces like infrastructure and banking. CRISIL said that while infrastructure development is largely decoupled from the rest of the global economy, banks are doing well with increased credit offtake and a potential downward trend in their non-performing assets ratios.

    FinTechs on shaky ground 

    But all isn’t well in paradise. FinTech funding has cooled off in the last two to three quarters on the back of the global environment, with VCs holding off on writing too many checks without solid fundamentals. FinTech funding in India declined 50% quarter-on-quarter in Q1 2022 compared to the previous quarter. It was further reduced by 16% in the most recent quarter, according to data by Tracxn. 

    This is exacerbated by the fact that it’s not early-stage funding that’s taking the hit but late-stage rounds. Later stage funding deals have declined by 71% in August 2022 compared to July 2022 and 45% lower than August 2021. 

    This means that many a FinTech out in the market to raise growth capital to propel them into long-term stable territories aren’t finding the backers they need. 

    Whether they have the cash and the guts to brave the winter is anybody’s guess. 

    That’s all from me this week. Don’t forget to sign up here for the FinBox webinar on October 19. I will see you next week. 

    As always, I am leaving some reading recommendations below. 

    Reading list

    1. RBI's proposal to link credit cards to UPI may benefit fintech platforms, say brokerage firms

    2. The what, WHY, and how of a Business Rules Engine │ Part II

    3. Is the RBI being too optimistic about India’s growth?

    4. How choice architecture can boost conversions & collections in digital lending

    5. Half of digital transformation over, cost-to-income ratios on tech spends plateaued: HDFC Bank

    6. How can lenders optimize DSA operations?

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