ICICI Bank recently partnered with Marg ERP, an inventory and accounting software solutions provider, to offer an integrated payments platform for Micro, Small and Medium Enterprises (MSMEs). This will pave way for financial inclusion for india’s MSMEs by providing them control over fund flow without making additional effort.
With the integration, businesses can keep a track of transactions happening in their bank accounts. Moreover, they will be able to eliminate data entry as well as manual accounting errors as transactions will be directly sourced from the bank. Such real-time banking together with transaction status visibility on their own accounting platform will help business owners take decisions more swiftly.
The development augurs well for the SME sector of India and is an apt case of technology facilitating entrepreneurial activity. The move can ensure the financial inclusion of a sector that is the backbone of Indian economy as it employs more than 40% of India’s workforce. Taken to its logical conclusion, the tie-up can lead to a number of interesting developments. It can mean greater credit and financial assistance to India’s small industry sector.
Anup Bagchi, Executive Director, ICICI Bank says that the collaboration will bring forth an integrated payments solution which offers MSMEs with unparalleled ease-of-doing business and will promote the concept of ‘Connected Banking’ in which different banking functions such as payments, initiating transactions and reconciliation can happen on a common platform. More importantly, the development will enable businesses in initiating vendor and salary payments digitally, apply for working capital loans as well as schedule future dated payments.
All this cannot happen if the accounting software of an enterprise is not linked to the banking system. For example, you need to process the company payroll as it is the end of month; however, you are unable to do so as payments from clients are due next week. Or you need a short-term loan, but you cannot apply as it is a holiday. Moreover, the bank’s processing will take up a few more days. By then the deal may be gone. Integration such as this can help enterprises get loans sanctioned directly and immediately. Modern technology has made that possible.
Technology Building Trust Between Banks and Enterprises
Changing gears, what would happen if a full-scale integration takes place between ERP and bank? It would lead to a number of important developments for the SMEs of India. ERP software keeps track of all monetary transactions of an enterprise like invoices, account receivables, inventory, balance sheet, etc. It also helps keep a real-time record of business resources such as raw material, cash, production capacity as well as other parameters like the status of business commitments, purchase orders and payroll. If this ERP software is fully integrated with a bank’s accounting system, the entire data will become available to the banks.
Banks are usually wary of dealing with small enterprises (but the irony is that the big fish such as Vijaya Mallya, Nirav Modi, etc. are able to extract finance due to their standing and connections with the bank). However, with this real-time visibility into a bank’s transactions, banks would be better placed to take really informed decisions and can offer financial assistance to enterprises under stress. On the basis of the data, banks would also be able to predict as well as monitor the growth and performance of an enterprise and can weed out defaulters. Banks can monitor the finances of an enterprise in real-time if they are red-flagged.
Impact of ERP-Banking Integration on India’s NPA Problem
Such a systemic integration would solve critical issues like non-performing assets (NPAs) or bad loans as well as paucity of funds for SMEs. Stressed assets or NPAs of Indian banks amount to as much as Rs. 10 lakh crore ($150 million). This is twice the GDP of a country like Sri Lanka and there is an urgent need to fix this malaise which is destabilizing India’s banking sector. A judicious use of technology can do just that.
Bringing SMEs into the Credit Net
According to a study carried out by the International Finance Corporation, 78% of SME credit needs in India is met from non-regulated or self-financed sources. Just 22% comes from financial bodies. Access to financial help is the biggest challenge that SMEs face in India today. Despite various government initiatives, including fiats to banks to diversify portfolio, setting up of the MSME ministry, stock exchanges dedicated to small industries, the problem still persists. With the technology landscape evolving so fast and facilitating processes unthinkable till a few years back, it is time to give India’s largest contributor their due.