India Leverages Digital Infrastructure to Enhance MSME Credit Access

Despite their crucial economic role, MSMEs face considerable credit challenges. The ADBI-ICRIER report identifies obstacles like inadequate collateral and high transaction costs. India's innovative digital public infrastructure, such as the Aadhar system and AA network, aims to bridge the information gap, improving MSME access to financial resources.

Micro, Small, and Medium-sized Enterprises (MSMEs) play a vital role in global economies but continue to face significant credit challenges. The June edition of the ICRIER-Asian Development Bank Institute's (ADBI) Policy Brief underscores hurdles such as inadequate collateral, difficulty in verifying creditworthiness, and high transaction costs, which make lending to MSMEs less attractive to financial institutions.

The ADBI highlights the lack of a robust information infrastructure for MSMEs, exacerbating the information gap between lenders and borrowers. Unlike large enterprises, MSMEs often have minimal access to capital markets and are viewed as riskier investments by banks. A 2023 ICRIER survey found that about 70% of surveyed MSMEs in India rely on promoter capital as their primary funding source, with only 20% opting for bank loans.

To mitigate these issues, India is leveraging its Digital Public Infrastructure (DPI) to boost financial access for MSMEs. Innovations like the Aadhar system for eKYC processes and the Account Aggregator (AA) network regulated by the RBI help bridge the information gap between lenders and borrowers, making credit more accessible. The AA ecosystem allows secure, consent-based data sharing, enhancing MSME access to funds. Additionally, public digital platforms like DigiLocker and UMANG are key components of India's DPI, aimed at efficient public service delivery. India’s digital strategy, highlighted during the G20 presidency, promises to address financial hurdles and improve MSME access to necessary financial resources.