How KYC compliance and capacity building can benefit the MSME sector through cybersecurity, stop online fraud

By Kumar Shekhar

Ease of doing business for MSMEs: The micro, small and medium enterprise (MSME) sector accounts for about 40% of India’s total exports and contributes one third of its GDP. With over 79 lakh MSMEs registered, the sector is responsible for employing around 12 crore people. It also allows for the inclusion of fringe entrepreneurs who lack basic information on the various digital frauds and compliances mandated by the Reserve Bank of India, as well as women and other traditionally underrepresented entrepreneurs.

To fully benefit from digital finance solutions, the MSME sector needs to understand how important it is to comply with regulatory requirements such as the need for comprehensive KYC. This will help them conduct their online business without worrying about potential legal repercussions. Additionally, they need to know more about cybersecurity, the importance of adhering to compliance practices, its ramifications, benefits, and integration if they want to grow their business in this digitally transformed world.

The main challenges facing the sector

Financial fraud

According to RBI, online fraud cases totaled Rs 128 crore in FY22. MSMEs have become more frequent targets of cyberattacks due to a lack of funding for comprehensive cybersecurity solutions. According to a recent report, small businesses are the target of more than 40% of cyberattacks, which cause an average global loss of more than $188,000 per attack. Small businesses in India said they were victims of cyberattacks in one form or another 62% of the time last year. These resulted in losses that exceed Rs 3.5 crores.

One of the main reasons for this financial fraud is failure to follow KYC requirements when opening accounts and failure to follow regulatory guidelines set by the government. Over the years, RBI has increased the pressure on banks, financial institutions and fintechs for ignoring the regulation in light of increasing cybercrime incidents. As a result, several financial institutions have been fined ranging from Rs 12.35 lakh to Rs 5.72 crore for their non-compliance.

Since customer identification is the first step in every process, KYC is essential in today’s financial world as a weapon in the fight against online crime and money laundering. By assessing and monitoring risks, KYC procedures aim to help prevent and detect illegal activities or terrorist financing.

Lack of capacity building

MSMEs have always struggled with serious problems of information asymmetry. For example, they are prevented from using benefits provided by the government, banks and other organizations due to lack of information about the different schemes. They also often lack the managerial, legal and technical expertise and resources needed to perform their duties well.

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Building the capacity of entrepreneurs is an essential prerequisite for the development of the sector as it provides them with the skills and resources they need to operate. The government has set up Business Development Centers (EDCs) within the District Industrial Centers (DICs) in each district to address this issue. These organizations provide the practical assistance required in many areas, such as technical expertise, management capacity, reduction of knowledge gaps, etc., having a multiplier effect. They can also help rural businesses with GST, IT, UAM registration, PAN applications, loan document preparation, and other issues.

Increase growth and make formalization possible

The MSME sector plays a crucial role in supply chains, innovation and the creation of new jobs. Therefore, there is a need to encourage, support and nurture innovative business ideas so that they can be turned into businesses. Moreover, the entrepreneurial spirit of the MSME ecosystem is not growing due to the small number of business development and incubation centers. Lack of formalization and low levels of registration of MSMEs in the Udyog Aadhaar Memorandum limit the use of various programs and credit support.

In addition, all stakeholders have struggled to develop targeted policies and effectively put them into practice in the areas of infrastructure development, formalization, technology adoption, backward and forward linkages, credit gap reduction and timely payments to MSMEs. Government interventions are used to being largely supply driven and unable to respond effectively to market demands.

Facilitate the acquisition of credit and venture capital

Due to their informal status, MSMEs cannot access formal credit as banks find it difficult to assess their credit risk due to a lack of financial data, historical cash flow information, etc. Moreover, very few MSMEs can obtain venture capital and equity financing. Support.

The importance of investing in a strong IT infrastructure has grown as more customers turn to digital platforms and businesses increasingly use customer information and data. Previously, the cost of deploying complex IT infrastructure was one of the main obstacles for MSMEs. However, it is now easier to implement essential and crucial IT security policies in the digitally connected world and with SaaS (Software-as-a-Service) to combat the rise of cyber fraud.

MSMEs fully compliant with prepaid accounts/cards have the advantage of having a maximum balance of Rs 2 lakhs. Banks and non-banks are allowed to issue prepayment instruments (PPI) with a maximum balance limit of Rs 10,000 for a minimum KYC account. However, it is mandatory to complete the full KYC within 24 months from the date of issuance of the PPI, otherwise no further credits are allowed. Ideally, it is good to have a full KYC account from day one if the infrastructure and cost allow it; this will lead to a win-win situation for the stakeholders including the institution, the client and the ecosystem.

However, the use of technology should be accompanied by all the required security measures. MSMEs should be made aware of all compliances and programs that are available for their benefit. Additionally, fintechs are gradually responding to the growing demand to only onboard fully compliant vendors and merchants. If the fintech sector strictly adheres to it, it will not only benefit them but also the MSME sector.

Kumar Shekhar is Deputy Country Manager at Tide India. The opinions expressed are those of the author.

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