Despite India’s micro, small and medium enterprises (MSMEs) contributing about a third of the country’s gross domestic product and employing over 110 million people, they struggle to access and afford credit. This credit gap is estimated to be as large as ₹20-25 trillion. MSMEs are overlooked by traditional lenders such as banks because they lack collateral and are unable to produce audited financial data such as balance sheets, income statements or credits in a current account, which renders them unable to prove their creditworthiness. Often, this leads to a vicious debt cycle created by borrowing from informal credit channels, including acquaintances and money lenders, at interest rates that are sometimes twice as high as the formal market’s. This severely hurts the growth of these small businesses and the socioeconomic development of the local communities these businesses are part of.
Despite India's micro, small and medium enterprises (MSMEs) contributing about a third of the country's gross domestic product and employing over 110 million people, they struggle to access and afford credit. This credit gap is estimated to be as large as ₹20-25 trillion. MSMEs are overlooked by traditional lenders such as banks because they lack collateral and are unable to produce audited financial data such as balance sheets, income statements or credits in a current account, which renders them unable to prove their creditworthiness. Often, this leads to a vicious debt cycle created by borrowing from informal credit channels, including acquaintances and money lenders, at interest rates that are sometimes twice as high as the formal market's. This severely hurts the growth of these small businesses and the socioeconomic development of the local communities these businesses are part of.
That said, a number of positive developments have emerged as a shot in the arm. For instance, India's expanded credit guarantee scheme for MSMEs is critical for continued economic growth and expanding employment opportunities across industries.
Also, we have seen how continued innovation in the open API (Application Programming Interface)-led India Stack—such as the Unified Payments Interface (UPI)—coupled with smartphone-driven participation in the digital economy has revolutionized digital payments in India. The Reserve Bank of India's (RBI) recent announcement on offering pre-sanctioned credit on UPI could extend this success by helping underserved segments access credit.
Further, initiatives to democratize access to data are proving to be game changers. In fact, some of these investments have not been hailed enough for the transformation potential they hold. For instance, let us look at the sustained efforts to boost the adoption of the Account Aggregator network—the independent entity that facilitates secure and consent-based financial data-sharing between customers and regulated financial institutions like banks, non-banking financial companies (NBFCs), insurers, mutual funds, etc—to make financial transactions including lending faster and cheaper. In November 2022, RBI added the goods and services tax network (GSTN) as a financial information provider to the Account Aggregator network. The GSTN, an integrated interface between the central and state governments and taxpayers for indirect taxation, is a rich source of data on cash flows for the Account Aggregator network, which helps banks and other regulated lenders extend credit to small businesses. This development is also improving customer journeys for all credit seekers and enhancing competitiveness among regulated lenders in the following ways:
Simpler customer consent mechanism: The process of obtaining customer consent to access both banking and GST data on the Account Aggregator network is now simpler while continuing to be just as secure. Consent is required just once, unlike twice in the previous scenario. Lenders can also seek consent for data-sharing in the future—for sustained access to a customer's updated GST feed. From a customer standpoint, MSMEs no longer have to rely on multiple data aggregators to share their GSTN data with financial institutions through API services for a fee.
A boost for risk-based pricing and cashflow-based lending: Regular GST data feeds on an MSME's month-on-month sales, gross profits, geographical revenue distribution and sales turnover combined with their bank statements can offer lenders insights into the actual cash flows of that business. These insights when used for credit evaluation and monitoring can enable risk-based pricing and cash flow-based lending, benefiting both the lender and MSME.
Creating a level-playing field for more competitive lending: All along, banks have had an edge over NBFCs in terms of access to key customer data by virtue of hosting their current accounts. The Account Aggregator framework will eventually level this playing field. Secondly, GST data offers NBFCs and other lenders operating in the MSME space valuable insights that can be used to tailor more contextualized and competitive customer offerings.
Value-added services: Proactive monitoring of regular GSTN data feeds and cash flow dashboards will enable financial entities to offer value-added services, such as GST compliance, tax planning and consulting services to help MSMEs optimize their GST-related spends. The data can also be used for fraud detection and prevention, and help lenders cross-sell better to this segment. In fact, fully digitalizing their customers' lending value chain will help financial institutions maximize the potential of this data.
Banks and NBFCs need to reorient and enhance their data capabilities by linking existing data sources such as bank statements and income tax returns with new and upcoming sources such as GST and e-invoice data to improve the efficiency and efficacy of their credit evaluation mechanisms. More importantly, with loans as small as ₹160 now being disbursed on platforms such as the Open Credit Enablement Network (OCEN), there is an opportunity to bridge the existing MSME lending gap.
While these are early days, open banking backed by data democratization and digital investments will have a far-reaching impact on inclusive socioeconomic development.
Sonali Kulkarni & Kiran Dhanwada are, respectively, lead and managing director for financial services, Accenture in India.