Digital rupee can strengthen India’s exports competitiveness
Dr. Vijay Kalantri, Chairman, World Trade Center Mumbai, Board Member, World Trade Centers Association and President, All India Association of Industries (AIAI) delivered Special Address at the Fintech
Festival India – Mumbai Micro Experience. The event was organized by Constellar Exhibitions India Pvt. Ltd., a subsidiary of TEMASEK Holdings & Singapore Press Holdings on November 25, 2021.
In his speech, Dr. Kalantri emphasized on the need for supporting digital lending innovations such as OCEN, Account Aggregators and TReDS to finance the growing unmet credit needs of MSMEs. Dr. Kalantri also called for the introduction of Digital Rupee to lure naïve investors away from risky private crypto currencies and also prevent money laundering. Dr. Kalantri, while raising concern about the risk of private crypto currencies, also called for progressive regulation to promote blockchain, which is the underlying technology behind crypto currencies.
The following is the Speech delivered by Dr. Kalantri at the inaugural session of the event.
“When you think of business, you come to WTC Mumbai. Not only in Mumbai, but across the world, the motto of World Trade Centers is ‘Prosperity Through Trade’. We strongly feel that digital technologies can give a major fillip to international trade. This program is a timely initiative to create a well-informed public discussion on new age digital technology, that will be the key driver of India’s inclusive growth.
The Covid-19 pandemic has tested the resilience of the Indian IT sector and created various opportunities for growth due to increased digitization. Economic incidents of the past few years such as demonetization, GST roll-out and the recent Covid-induced lockdowns have made the Indian populace tech-savvy, even in the informal sector.
Hon’ble Prime Minister Shri Narendra Modi has recently expressed, “We are building the world's most extensive public information infrastructure. Over 1.3 billion Indians have a unique digital identity. We are on our way to connect six hundred thousand villages with broadband. We have built the world's most efficient payment infrastructure, the UPI. Over 800 million Indians use internet; 750 million are on smart-phones. We are one of the largest consumer of data per capita and have one of the cheapest data in the world.”
MSMEs are considered the backbone of the Indian economy. They constitute 99 percent of all enterprises, generate about 45 percent of the manufacturing output, about 40 percent of the exports and are a major contributor to employment in the economy. Despite such an outstanding performance, they face financing challenges. According to a report by International Finance Corporation (IFC) released in 2018, the estimated demand for finance from the MSME sector is Rs. 87 trillion, of which demand for debt capital is pegged at Rs. 69 trillion and demand for equity capital is estimated at Rs. 18 trillion.
However, MSME financing is mainly restricted to bank financing in India where again it is the large organisations that get a preferential treatment. Due to the limited options available for financing, the cost of MSME financing goes up such as in the form of high interest rates. This deters the growth process of MSMEs.
New-age Fintech Solutions
Increased digital footprint can allow MSMEs to benefit from collateral-free loans provided by fintech companies. The government is encouraging alternative modes of credit such as digital financing platforms which are backed by technology-based loan evaluation parameters that automate the application process and accept paperless documentation. These platforms also make the entire process transparent. Thus, with improved digital footprint of MSMEs, the inefficiencies of the informal money lending system are getting eliminated.
With increased mobile penetration, individuals and firms leave a huge digital footprint of their transactions such as payments, remittances and choices. These enable fintech firms to make informed decisions about the credit worthiness of these firms and offer credit within a short span of time. Factors such as availability of cheap smart phones, affordable high-speed data plans, convenience of transacting through the digital mode and a tech-savvy young population enhance the possibilities of the evolution of a dynamic fintech sector in India.
Trade Receivables electronic Discounting System
The government has initiated some timely reforms such as encouraging registration on the Trade Receivables electronic Discounting System (TReDS) platform, wherein MSMEs can now get a better rate for discounting their bills receivable from competitive bidding of banks for the same on the TReDS exchange.
TReDS provides without recourse financing for MSME sellers. Financiers see the strength of the buyer and not the credit rating of the MSME. This is significant for easing the working capital finance requirements of MSMEs.
Open Credit Enablement Network
With increased digitization, many MSMEs are getting themselves registered on e-commerce platforms and e-marketplaces. These online aggregators have a digital trail of the financial footprint left behind by the registered MSMEs. Thus, these online intermediaries can synthesize lenders’ credit products as part of their core offerings, using the Open Credit Enablement Network (OCEN) and Account Aggregator (AA) framework, and offer working capital finance to MSMEs.
The new digital paradigm based on OCEN and AA frameworks allows easy sharing of data, thereby reducing the compliance time and costs involved in obtaining and verifying data such as KYC. Financing is based on continuous cash flows rather than income and assets. Targeting ensures that only deserving entities, that are less likely to default, get financial assistance.
The Indian government is planning to introduce a central bank digital currency (CBDC) regulated by the Reserve Bank of India (RBI). Thus, the RBI may soon launch a Digital Rupee in India.
Introduction of the Digital Rupee, in place of private crypto currencies, can curb black money and illicit use of cash in funding terrorism and money laundering, improve financial inclusion through Direct Benefit Transfers directly in the accounts of the intended beneficiaries, improve monetary policy transmission by reducing intermediation of banks and reduce financial transaction costs.
Thus, transacting in the digital rupee can render our MSME exporters competitive, thereby enhancing our participation in foreign trade.
The buzz around crypto currencies is rising as they are perceived as a promising new-age asset class giving inflation-beating returns. The interest towards crypto currencies is growing as the government may take a progressive step of allowing trading in crypto currencies with checks and balances based on best practices in foreign countries.
Increased formalization of the economy and improved governance hold the promise of leapfrogging our economy, and the IT / ITeS sector serves as a backbone for the same. Given that these services can transform the entire gamut of industries, ranging from manufacturing, agriculture and urban development to finance, education and healthcare services, the sector calls for increased thrust and development support.
Keeping all these challenges and opportunities in view, WTC Mumbai, like our partner Constellar India, is dedicated towards building a community that encourages international trade. The fact that FinTech Festival India will be held in Mumbai and Pune World Trade Center gives weight to our pledges to the business community. This event, without a doubt, will boost our efforts to take India’s finance and IT communities to new heights on the world stage. It gives us great pleasure to confirm that the World Trade Center will be beside Constellar on this remarkable voyage through the world of FinTech.
With that, I would like to thank everyone of you for joining me today and my best wishes to Constellar and FinTech Festival India for today and all their future endeavours.”