While the Micro, Small and Medium Enterprises (MSMEs) continue to face major financial hurdles, India is leveraging its Digital Public Infrastructure (DPI) to enhance financial success for the MSMEs.
Through tools like India Stack and the account aggregator (AA) network, the country is aiming to close the credit gap, as per the June edition of the Indian Council for Research on International Economic Relations- Asian Development Bank Institute’s (ICRIER-ADBI) policy brief.
The report also highlights several key obstacles that make lending to MSMEs less attractive for financial institutions.
As per the report, there exists a lack of information infrastructure for MSMEs, which increases the information gap between lenders and borrowers. MSMEs often have minimal connections to capital markets and, financial institutions find it costly to monitor small loans continuously.
The report identifies key problems regarding the credit gap. These include the inadequacy of collateral, difficulties in verifying the creditworthiness of MSMEs and high transaction costs associated with small loans.
A survey by ICRIER in 2023 revealed that the majority of MSMEs in India depend on promoter capital. “Over 2,000 registered MSMEs in India found that their own capital is the primary source of finance for approximately 70 per cent of surveyed MSMEs,” as per the survey data.
The report also highlights innovation and a comprehensive set of digital tools such as Aadhaar and Account aggregator network. Aadhaar works as a foundation for electronic know-your-customer (eKYC) processes and for Aadhaar-enabled payment systems.
“Data exchange DPIs such as India’s AA network are a step toward open banking, a banking practice that connects financial information users with providers by providing access to the financial data of customers through an application programming interface (API),” the report states.
The report adds, “The AA ecosystem has eased MSMEs’ access to credit by facilitating secure and consent-based data sharing of financial information between the providers and users.”
The account aggregator (AA) network enables individuals to securely share their financial information from one bank or financial institution to another within the network, thus making it easier for MSMEs to access credit.
According to the report, DPIs like DigiLocker, UMANG, the rapid assessment system, API Setu, India Stack Global and Poshan Tracker are crucial components of the country’s DPI.
