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MSMEs can formalize ops well via neobanks’ aid: report

Access to formal credit has been a key challenge for India’s micro, small, and medium enterprises (MSMEs), which employ about 111 million people

Digital-only banks, or neobanks, have the potential to meet the financing needs of small businesses and help digitize and formalize their operations, according to a Vidhi Centre for Legal Policy report.

Access to formal credit has been a key challenge for India’s micro, small, and medium enterprises (MSMEs), which employ about 111 million people. Digital banks can support underserved market segments as access to credit from traditional banks have been limited due to the informal nature of businesses, low turnover, and inability to provide collateral.

“One common customer segment that seems to have gained popularity with such digital-only banking models (both in India and globally) is the MSME segment. Through their technology focused operations, these banks are able to offer a range of services to meet the varied banking and business needs of such establishments," the report said.

India’s neobanking sector is at a nascent stage and at present there are 17 neo-banking platforms, including Niyo, RazorpayX, Instantpay, Jupiter, and Nupay, the Vidhi report said. Digital-only banking functions as a partnership between a licensed bank and fintech companies, as Indian laws do not allow digital banks. The non-banks provide the tech platform through which banking and value-added services, including opening and operating savings or current accounts with licensed banks, applying for loans, generating invoices, accounting, and ensuring compliance with goods and services tax norms, are accessed. Such platforms typically target millennials, startups and MSMEs.

However, in countries such as South Korea, China, and the UK, digital-only banks are licensed to provide all banking services.

“Licensed digital banks that allow end-to-end banking operations to take place have emerged in certain jurisdictions. The digital-only banking model may play an important role in providing critical banking services and contributing to the growth of a robust and competitive banking sector," the report noted.

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