Every economy in the world is dependent on global markets, and downturns on the world stage are bound to have a snowball effect. However, MSMEs that form the bedrock of any economic structure can insulate any nation’s economy from global spillovers and tide over a possible recession.
The sector predominantly comprises homegrown businesses and small-scale enterprises that could do with better infrastructure, technology, and finance. In India, the MSME sector currently contributes nearly 30 per cent to the nation’s GDP, makes up nearly 40% of the country’s exports and has risen to become the third-largest contributor to the country’s economy. With such a backdrop, the sector plays a very important role in buffering India’s economy from global economic shocks and adversities. While India aims to become a $5 trillion economy by 2026-27, the Micro, Small and Medium (MSME) sector is geared to rise as one of the key growth drivers in achieving this ambitious target.
Given that MSMEs are poised to play such a pivotal role in India’s growth, there is a need to address the challenges that curb their development. As the sector continues to boost the economy, the interests of over 63 million MSMEs and its 110 million plus employees must be safeguarded against threats such as fraud, a money crunch, and paucity of trust between its players.
Let’s dive into one of the most significant challenges that MSMEs face and how digital escrow holds the potential to mitigate these.
Lack of Liquidity
Consider a scenario where you employ more than 20 people and don’t have funds available to credit their salaries at the end of the month. The crisis is not because your business isn’t doing well but because your money is stuck with buyers who routinely delay payments despite the delivery of goods or services. Furthermore, you don’t have the choice to get credit as you already have done so many times in the past in similar situations. Such is the situation that many MSMEs face on a daily basis. A whopping 10.7 lakh crore of funds is currently stuck as delayed payments to MSMEs, amounting to 6% of India’s gross value added for FY 2020-2021.
Although laws exist in India to protect the interest of suppliers against default and delayed payments, the legal process in itself is arduous and expensive. The threat of legal action also strains business relationships and impacts repeat business. To overcome this hurdle, most enterprise suppliers opt for mitigating measures such as loans, discounted prices, and varied repayment durations from buyers to ensure enough working capital. Although these quick-fix measures do provide temporary respite to MSMEs, they bring their own set of challenges, the biggest being the ever-increasing debt trap that looms large on enterprise suppliers and the burden on employees and their livelihood as a result of delayed payments.
How digital escrow can help
Fortunately, there is hope near at hand for MSMEs with digital escrow having made an entry into the Indian ecosystem. For the unfamiliar, an escrow account is a financial instrument in which a third party supervises assets or money on behalf of the two primary parties who have initiated a business transaction. It is a tripartite agreement between the escrow provider, seller and buyer, wherein an escrow account is created to hold money, funds, securities, and other types of assets.
Once the payment amount is agreed upon between the buyer and the seller, the buyer deposits the money either in full or in part into the escrow. The money in the escrow is released only once the terms and conditions that the buyer and seller agreed upon are fully met. This ensures that the money required for the business transaction is already in the escrow account, and buyers cannot retract or default in making the payment after receiving the products. This protects the interests of the suppliers and assures them that their money is intact and that they will no longer be at the mercy of buyers. It also gives buyers the guarantee that their investment is in safe hands while they ensure that the products they have received meet expectations and are in sound condition.
Although not a new concept, escrows were originally preferred by big corporations for large transactions such as cross-border deals and mergers and acquisitions. As one can imagine, not only were these services traditionally expensive, but they were also tedious and sometimes took weeks or even months to create. Thanks to the democratization of technology and its impact on the Indian economy, escrows are now available to both consumers and big and small sectors who seek increasingly secure and transparent transactions. With digitization, users can create a unique instant digital escrow facility with just an e-KYC and e-agreement in a matter of days! Some of the new-generation escrows have gone a step further by shielding businesses with dedicated multi-party protection systems and different levels of authentication.
Escrows-as-a-service can be the lifeline that MSMEs in India were looking for, as this service helps build a more trust-based transaction ecosystem by introducing much-needed transparency. Additionally, the escrow system is designed to ensure that every transaction follows a step-by-step process under the supervision of seasoned professionals, who monitor and track every stage of the agreed terms of the contract from start to end. This enables both parties to know the progress of their mutual commitments, stages of completion, and the movement of funds at every stage.
While the MSMEs are steadily but surely opening up to the idea of adopting digital escrows, there is a thriving community of gig workers working remotely across India who has been lightning-quick on the uptake and is availing the benefits of the escrow service to ensure that they get paid on time for their freelance work.
About the Company Castler is a pioneer in the field of Digital Escrow Banking. Castler Digital Escrow is innovating and disrupting the existing $100Bn Escrow Banking Market in India. Castler also wants to democratize Escrow Banking for Consumers and MSMEs and will be launching a Retail Digital Escrow Product soon incorporated in 2020 and launched in April 2021.
Founded by startup veterans, Vineet Singh and Dinesh Kumar, Castler has achieved astronomic growth with a dedicated team of just 10 people. Vineet and Dinesh are seasoned operators & domain experts and built & scaled large Billion Dollar businesses.
Castler has built a World’s First Digital Escrow Transaction Banking Suite and has partnered with 10 Banks, leading Law Firms and Trusteeship Companies to provide an end-to-end solution comprising Digital Escrow + Agreements & Contracts + Trusteeship Services. The 3-in-1 Castler Solution helps Enterprises save cost, time & resources in their usage of Escrow Banking.
Castler has raised an idea-stage pre-seed round of $500K from Venture Catalysts, 9Unicorns, LetsVenture, AngelList and Pointone Capital.
(The author is Mr. Vineet Singh, Co-Founder & CEO at Castler and the views expressed in this article are his own)
