1 day Ago By CNBCTV18
Micro, Small and Medium Enterprises (MSMEs) have consistently proven to be the backbone of India’s economy, contributing nearly 30% to the nation’s GDP and accounting for around 40% of its exports. The sector has not only supported economic inclusivity but has also been a significant driver of employment generation across diverse industries. In recent years, MSMEs have showcased remarkable resilience, especially in their adoption of digital platforms and innovative business models.
However, in the recent past, unique challenges and structural barriers have posed certain problems for the sector, with one of the biggest challenges being the disrupted credit flow through digital lending. Recent government initiatives have played a pivotal role in driving India’s economic growth. Products like the Unified Lending Interface (ULI) which is currently in its pilot stage and has already disbursed over 6 lakh loans amounting to ₹ 27,000 crore as of December 2024, integrates multiple data sources like Aadhaar, e-KYC and PAN validation, reducing reliance on collateral and extensive documentation.
UPI on the other hand has boosted credit access for underserved groups, by including subprime and new-to-credit borrowers to access formal credit for the first time and has enabled fintech lenders to scale loan volumes faster than banks and extend smaller loans. Though products like ULI and UPI have widened the accessibility, the MSME ecosystem still faces significant hurdles in getting timely and adequate credit. A fluctuating credit flow through digital lenders and NBFCs has emerged as one such barrier.
Interestingly, the NBFC sector has shown immense potential in MSME financing, with credit growth by NBFCs to the MSME segment being more than three times that of banks, according to recent SBI data. This underscores a tremendous opportunity to scale the credit delivery system further and ensure that MSMEs receive the financial support they need to grow and thrive. As we approach the Union Budget 2025, addressing these challenges and introducing targeted policy interventions can unlock the full potential of MSMEs, thereby driving economic growth on a larger scale.
The following four measures can support these small businesses: Expanding API-Based Access to MSME Data: A key area that demands attention is the enhancement of RBI’s Account Aggregator (AA) framework, which is designed to enable consent-based data sharing and improve financial transparency. While the AA framework has been revolutionary with the adoption success rate ranging between 30-35%, its true potential is yet to be unlocked. To enable this, the government can mandate banks to share data from partnership and private limited company accounts, as well as current accounts, on the AA network.
This would ensure that digital lenders can access a broader and more reliable pool of financial data, simplifying the credit underwriting process. Additionally, less than 0.01% of GST records are currently available through the AA framework.
Ensuring the comprehensive availability of GST data would significantly reduce the friction MSMEs face in accessing credit, enabling more efficient and reliable data usage for cost-effective credit assessment. Enabling Cash-flow-Based Financing: MSMEs, particularly in retail, e-commerce, and other digitally-driven sectors, generate a significant portion of their revenues through online platforms. Allowing direct deductions from these cash flows for loan repayments could simplify credit access and improve repayment efficiency.
Setting up virtual account escrow systems operated by regulated entities would allow MSMEs to repay loans directly from their revenue streams without any additional administrative burden. Expanding regulations to enable Payment Aggregators (PAs) and Payment Gateways (PGs) to settle funds directly into MSME loan accounts would further streamline the repayment process. Empowering LSPs Through Data Control Relaxations: In addition, the role of Loan Service Providers (LSPs) in MSME financing must be revisited.
LSPs often bring deep sectoral knowledge and insights, which help in better underwriting and risk management. However, the current data control guidelines have created uncertainty around how LSPs collect, store, and share information. Aligning these regulations with the Digital Personal Data Protection (DPDP) Act would further allow LSPs to operate as value-added partners rather than mere agents of regulated entities.
This would enable LSPs to contribute more effectively to credit origination and management, thereby improving credit access and quality for MSMEs. Moreover, allowing LSPs to emerge as equal stakeholders in the digital lending ecosystem would pave the way for innovative solutions that cater to the unique needs of small businesses. Unlocking the Potential of NBFC-NBFC Co-Lending: Co-lending partnerships between NBFCs and banks represent another powerful mechanism to amplify credit delivery to MSMEs.
However, these partnerships remain underutilised due to the application of traditional wholesale lending criteria by banks. To address this, it is essential to create awareness around Co-Lending Model 2 (CLM2) partnerships, which bypass NBFC credit risk while leveraging their extensive reach. Promoting CLM2 partnerships through roundtables and other initiatives could unlock the potential of digital NBFCs, even those with lower ratings, to partner with banks and deliver credit to underserved MSME segments.
Additionally, extending co-lending provisions to allow collaborations between large and small NBFCs would further enhance credit delivery, ensuring that micro and small enterprises gain access to much-needed financial resources. MSMEs have always been the backbone of India’s economic growth, and their sustained progress is pivotal to achieving the nation’s vision of a $5 trillion economy. The Union Budget has the potential to address these key barriers and deliver solutions that not only accelerate credit access but also ensure its sustainability.
By prioritizing these policy interventions, the government can empower the MSME sector to thrive in the digital age and drive inclusive growth for the entire nation. —The author, Alok Mittal, is Co-founder and MD at Indifi Technologies. The views are personal.
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