Small and Medium Enterprises represent about 90% of businesses and more than 50% of employment worldwide. Formal SMEs contribute up to 40% of national income (GDP) in emerging economies. These numbers are significantly higher when informal SMEs are included.
- SME’s and the road to net zero: Larger corporations now have to measure and address their Scope 3 greenhouse gas emissions. SMEs usually at the centre of corporate supply chains, are increasingly being asked to provide data on their emissions and to take action to reduce them. Banks have the power to assist SMEs through several means. They can extend lending for credible emissions reduction and broader sustainability objectives of these SMEs. It is a big opportunity for them to extend ESG financing and Transition financing and will enable banks to also extend their customer base to the low-carbon, renewable energy sectors of the economy.
- Open Banking to improve the credit infrastructure: Access to credit is one of the biggest hurdles for SME businesses. Risk aversion in banks often make them reluctant to give out credit to SMEs. What’s more, banks have limited information to make decisions about the creditworthiness of SME customers and so require statements and credit scores from them to prove their financial stability. With innovations in the area of open banking and bank-fintech partnerships on the rise, banks now have access to an enhanced aggregated view of all the SME’s accounts and credit history from multiple banks and other sources. This opens up a huge market opportunity for SME banking and is likely to be a major focus area in 2023.
- Supply Chain Finance (SCF): One of the oldest financial instruments, SCF’s true potential can be unlocked for SMEs and MSMEs using Innovation. Some business model innovations gaining momentum here include Dynamic Discounting, Early Cycle Discounting, and Securitisation of SCF. Dynamic discounting entails the encouragement of early payments from buyers in exchange for cash discounts. In Early Cycle Discounting, predictive analytical technology using historical purchase data, shipment, invoices and payment data can enable financing to be extended before an invoice is approved. There is also the possibility of Banks and Fintechs working together to provide invoice-backed securities to investors to re-invest cash flows from invoices.
Author: Nishtha Asthana
