According to Vidhi Centre for Legal Policy’s report, MSMEs have been traditionally underserved by the formal banking segment
The MSME sector has been badly hit by the pandemic. Being an immensely unorganised sector, it also has not received access to banking services and credit facilities easily, in turn, making its revival difficult.
According to Vidhi Centre for Legal Policy's report, MSMEs have been traditionally underserved by the formal banking segment, which makes this sector a particularly attractive business proposition for emerging digital-only banking models. In March 2019 alone, the estimated credit gap stood at INR 20 25 trillion. Banks have also been encouraged to increase outreach of banking services by utilising technology to lower operating costs and increase efficiency.
In the country, digital banking is basically an association of licensed banks and non-banks viz. fintech organisations. They render access to regulated activities like managing a bank account, issuance of credit, debit and prepaid card and offering credit. On the other hand, fintech firms render a platform wherein consumers can have access to several banks and handle value added service.
Emphasising on the importance of neobanking, the report states, "For businesses, the market for neobanking is an attractive proposition for three reasons: one, it allows them to leverage new digital-only business models which rely on new revenue streams; two, there is an existing incentive to tap-into underserved market segments; three, the participation barriers have been lowered due to technology."