Digital Public Infrastructure Boosts MSME Financial Inclusion

In the vibrant tapestry of the global economy, Micro, Small, and Medium Enterprises (MSMEs) serve as vital threads that weave innovation, employment, and growth. However, these enterprises are currently navigating a labyrinth of challenges that threaten their potential and hinder their financial inclusion. Many MSMEs struggle to access credit due to a lack of formal credit histories, insufficient financial literacy, and limited awareness of available financial products. Additionally, high input costs and fluctuating market demands have intensified their vulnerabilities. A PwC 2024 MSME survey highlights this struggle, revealing that more than half of MSMEs globally reported falling sales, and thus there is an urgent need for effective financial solutions that can empower these businesses to thrive.

A slew of initiatives and policies have been implemented by the Indian government under the aegis of the Small Industries Development Bank of India (SIDBI), the National Bank for Agriculture and Rural Development (NABARD), the Atma-Nirbhar Bharat Abhiyaan, as well as credit guarantee schemes such as CLCSS (Credit Linked Capital Subsidy Scheme) and CGSSD (Credit Guarantee Scheme for Subordinate Debt). These efforts aim to enhance access to financial resources for MSMEs, promoting financial inclusivity in a challenging economic landscape. However, in the backdrop of global complexities and tough economic pressures, a newer and resilient financing model is not only inevitable but the need of the hour. After all, such a growth model augurs well in creating jobs and economic impact at the last mile.

Digital Public Infrastructure (DPI) & Financial Inclusio

As a concept, Digital Public Infrastructure (DPI) involves several digital nuances such as digital IDs, digital payments, and public credit registries. These have the potential to transform the MSME’s access to financial services. Digital IDs in the words of the Bill & Melinda Gates Foundation have been effective in tackling poverty. Similarly, in emerging economies, digital IDs can help bring much-needed attention on undocumented micro and small businesses. This in turn could allow MSMEs to access credit, launch bank accounts, and engage in secure financial transactions.

To a lender, digital IDs can be indispensable in verification, KYC, paperwork reduction and speeding up of the loan processing timelines. DPIs could also simplify transactions and provide transparent records for credit assessment. The DPI concept appears compelling by nature, it is also collaborative. However, implementation could be a challenge. The OCEN (Open Credit Enablement Network), for example, promised a similar model - it aimed to reimagine the way MSMEs accessed credit via digital routes.

Such an idea offered to reduce costs for a lender and provide better loan options to the borrower. However, adoption of OCEN faced challenges since many MSME sub-sectors were extensively cash-dependent. Although a microfinance model could overcome such hurdles, today it is much easier to create awareness about the benefits of digital transactions and offer incentives for MSMEs to engage with formal lending channels. Models such as Unified Payments Interface (UPI) are already popular among MSMEs and a wider adoption could be targeted by several financial institutions. Given the awareness and size of UPI, it can be leveraged to bridge financial gaps for MSMEs by making transactions accessible and cost-effective.

Leveraging a tech-stack

If DPIs could enable governments and regulators to track financial transactions, newer tech-stacks could unlock new avenues to scores of MSMEs and financial institutions. For instance, today, alternative scoring models can be created to tackle the challenge of lack of formal credit histories. Such solutions leverage non-traditional data sources such as social media activity, transaction history, and even business cash flows. Moreover, a relationship between the borrower and lender could be symbiotic in nature. Such a hand-holding can inspire many MSMEs to follow transparent processes and adopt operational efficiencies. MSMEs operating on e-commerce platforms, furthermore, can establish sales histories which in turn can be helpful in improving credit-worthiness.

On the other hand, emerging technologies like blockchain present innovative financing opportunities, especially through tokenized assets, which facilitate decentralized and transparent financial transactions. By leveraging blockchain-based systems, MSMEs can secure funding by issuing digital tokens supported by their assets or income streams, thus providing greater transparency and security for both lenders and borrowers. Also, regulatory sandboxes allow fintech firms to experiment with new financial products within a controlled setting, building innovation without compromising consumer protections. Such initiatives support banks, fintech companies, and alternative lenders in exploring calculated risks, thus contributing to a more inclusive and resilient financing ecosystem for MSMEs. 

Policy & the role of government

To further advance MSME financing, policymakers can prioritise the expansion of specialised debt and equity platforms designed for MSMEs. Enhancing credit registries with alternative data sources will also enable MSMEs to better demonstrate their creditworthiness, opening up access to critical funding. Additionally, initiatives that encourage knowledge-sharing among fintech firms, banks, and governmental bodies can promote a more inclusive and innovative financial landscape. Such policy adjustments align with larger goals to build a supportive infrastructure that strengthens the resilience and growth potential of MSMEs worldwide.

As financial solutions continue to advance, the landscape of MSME financing is poised for significant transformation. Innovations such as DPI, blockchain, and alternative credit scoring methods provide effective tools to close financial access gaps. Regulatory support and government-backed programs will further support inclusive finance, empowering MSMEs to grow and succeed. Embracing these new developments positions MSMEs to better compete, innovate, and drive sustainable economic progress. However, ongoing global cooperation and commitment to innovation remain essential for ensuring MSMEs have continuous access to the resources they need for future growth.