India's Digital Infrastructure paving ways for MSME financial inclusion: ICRIER-ADBI

New Delhi [India], July 18 (ANI): Despite their significant role in boosting economies worldwide, Micro, Small, and Medium-sized Enterprises (MSMEs) face substantial challenges of credit as highlighted in the June edition of the ICRIER-Asian Development Bank Institute's (ADBI) Policy Brief.
The report identifies several key obstacles, such as the inadequacy of collateral, difficulties in verifying the creditworthiness of MSMEs, and the high transaction costs associated with providing small loans. These factors make lending to MSMEs less attractive for financial institutions.
The ADBI highlights the lack of information infrastructure for MSMEs, which exacerbates the information gap between lenders and borrowers. Unlike large enterprises, MSMEs often have minimal connections to capital markets, and financial institutions, find it costly to monitor small loans continuously. Consequently, MSMEs are viewed as riskier investments by banks and other lenders.
A 2023 survey by the Indian Council for Research on International Economic Relations (ICRIER) says majority of MSME's in India depends on promoter capital
"Over 2,000 registered MSMEs in India found that their own capital, which is the capital contributed by the owner of a business, is the primary source of finance for approximately 70 per cent of surveyed MSMEs (ICRIER 2023). Only a fifth of the surveyed MSMEs report using bank loans as the major source of finance for their business."
To address these challenges, India is leveraging its Digital Public Infrastructure (DPI) to enhance financial access for MSMEs. The report highlights innovation and a comprehensive set of digital tools such as Aadhar the country's unique identity number. Aadhar is used as a foundation for electronic know-your-customer (eKYC) processes and for Aadhaar-enabled payments system.
Secondly, the account aggregator (AA) network regulated by RBI enables individuals to securely share their financial information from one bank or financial institution to another within the network. The digital exchange of financial data helping to bridge the information gap between lenders and borrowers and making it easier for MSME's to access credit.
"Data exchange DPIs such as India's AA network are a step toward open banking, a banking practice that connects financial information users with financial information providers by providing access to the financial data of customers through an API. They act as consent managers for these customers." Says the report
"The AA ecosystem has eased MSMEs' access to credit by facilitating secure and consent-based data sharing of financial information between providers and users," the report added.
The report further underscores the public digital platforms like DigiLocker, UMANG, the Rapid Assessment System, OpenForge, API Setu, Poshan Tracker, the National AI Portal, MyScheme, and India Stack Global as crucial components of India's DPI.
These platforms, emphasised during India's G20 presidency, aim to deliver public services more efficiently across sectors.
While the report noted that MSMEs continue to face significant financial hurdles, India's innovative use of digital infrastructure presents a promising solution. By enhancing financial inclusion through tools like India Stack and the AA network, the country aims to close the credit gap and provide MSMEs with better access to the financial resources they need to thrive. (ANI)