Despite India’s micro, small and medium enterprises (MSMEs) contributing nearly a third of the country’s GDP and employing over 110 million people, they struggle to access and afford credit. It is estimated to be as large as the credit gap 20-25 trillion. MSMEs are overlooked by traditional lenders such as banks as they lack collateral and are unable to produce audited financial data such as balance sheets, income statements or credits in current accounts, which enable them to prove their creditworthiness. makes it incapacitated. Often, this leads to a vicious cycle created by borrowing from informal credit channels, including acquaintances and moneylenders, at interest rates that are sometimes twice as high as those in the formal market. This seriously harms the growth of these small businesses and the socioeconomic development of the local communities these businesses are a part of.
That said, several positive developments have emerged as a shot in the arm. For example, India’s Extended Credit Guarantee Scheme for MSMEs is vital for sustained economic growth and expansion of employment opportunities across industries.
At the same time, we have seen how continuous innovation in the India stack led by open APIs (application programming interfaces) – such as the Unified Payments Interface (UPI) – coupled with smartphone-driven participation in the digital economy, is revolutionizing digital payments in India. Is. This success could be an extension of the Reserve Bank of India’s (RBI) recent announcement to offer pre-approved credit on UPI, which could help underserved segments access credit.
Moreover, the initiative to democratize access to data is proving to be a game changer. In fact, some of these investments are not appreciated enough for their transformative potential. For example, let’s look at the ongoing efforts to promote the adoption of account aggregator networks – an independent entity that enables secure and consent-based financial data-sharing between customers and regulated financial institutions such as banks, non-banking financial companies (NBFCs). provides the facility. ), insurers, mutual funds, etc.—to conduct financial transactions, including faster and cheaper lending. In November 2022, the RBI added the Goods and Services Tax Network (GSTN) as a financial information provider to the account aggregator network. GSTN, a unified interface between central and state governments and taxpayers for indirect taxation, is a rich source of data on cash flows for account aggregator networks, which help banks and other regulated lenders lend to small businesses. This development is also improving the customer journey for all credit seekers and increasing competitiveness among regulated lenders in the following ways:
Simple Customer Consent Mechanism: The process of obtaining customer consent to access both banking and GST data on the account aggregator network is now secure as well as simple. Consent is required only once, as opposed to twice in the previous scenario. Lenders can also obtain consent for data-sharing in the future – for continuous access to the updated GST feed of the customer. From a customer perspective, MSMEs no longer have to depend on multiple data aggregators to share their GSTN data with financial institutions through API services for a fee.
Promotion of risk-based pricing and cashflow-based lending: Feeds regular GST data on month-to-month sales, gross profit, geographic revenue distribution and sales turnover of an MSME along with their bank statements, which can provide lenders with an insight into the actual cash flow of that business. These insights when used for credit assessment and monitoring can enable risk-based pricing and cash flow-based lending, thereby benefiting both the lender and the MSME.
Creating a level playing field for more competitive lending: All along, banks have been ahead of 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 provides valuable insights to NBFCs and other lenders operating in the MSME sector which can be used to design more relevant and competitive customer offerings.
value added services: Regular GSTN data feed and active monitoring of cash flow dashboard will enable financial institutions to offer value added services such as GST compliance, tax planning and advisory services, to help MSMEs optimize their GST related expenses. The data can also be used for fraud detection and prevention, and help lenders sell better to this segment. In fact, completely digitizing the loan value chain of their customers will help financial institutions maximize the potential of this data.
Banks and NBFCs to re-orient 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 assessment mechanisms is required. More importantly, with smaller loans 160 now being distributed 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 supported by data democratization and digital investments will have a far-reaching impact on inclusive socioeconomic development.
Sonali Kulkarni and Kiran Dhanwada are the heads and managing directors of Accenture’s financial services in India, respectively.
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