GSTN and UPI will help expedite financial inclusion
For India’s credit-starved micro, small and medium-sized enterprises (MSMEs), the Goods and Services Tax (GST) might unlock a new source of credit. Organizations like the Federation of Indian Small and Medium Enterprises (FISME) estimate that only around 5% of MSMEs access institutional funds through banks and financial institutions. In the absence of funding from mainstream financial institutions, most Indian MSMEs have to rely on the informal lending sector, or their own internal accruals, or borrowing from friends and family, for growth capital.
While the informal sector offers loans at high rates of interest, they tend to issue loans quickly, and with little or no collateral. Internal accruals may often not be sufficient to fuel the growth needs of an MSME, while friends and family are not always an ideal source of growth capital. Thus, a promising engine of economic growth sputters and chokes.
The ministry of micro, small and medium enterprises points out that MSMEs contribute nearly 8% of the country’s GDP, 45% of the manufacturing output and 40% of the exports and provide the largest share of employment after agriculture.
One of the major reasons why banks refrain from lending to MSMEs is lack of reliable financial information. The high transaction costs involved in lending small amounts to MSMEs is another major barrier. India’s Goods and Service Tax Network (GSTN) has the ability to solve both these challenges.
GSTN will bring online seven million organizations and five billion invoices every month. In the GSTN system, the invoices raised by a party have to be accepted by the counter-party for it to be processed further. This ‘deemed acceptance’ means that each invoice is a verified invoice.
This enables bill discounting on a massive scale that was not possible earlier because the cost of verifying the authenticity of invoices was high.
GSTN is one of the largest IT systems in the world, and the billions of invoices flowing through this system will provide lenders with massive amounts of reliable data on MSMEs. When borrowers provide access to their GSTN data to lenders, it will enable lenders to create detailed understanding of the borrower’s cash flows, and create customized credit products. This detailed understanding of cash flows paves the way for flow-based lending. In the absence of such insights, lenders sought collateral to mitigate their risk. For MSMEs that typically do not have much collateral to offer, this can be a significant source of growth capital in the next few years.
For lenders, the availability of GSTN data through open application programming interfaces (APIs) means that they can process vast amounts of data, run algorithms with their risk assessment parameters on the GST returns shared with them by MSMEs, and swiftly get back to customers with loan offers. This can reduce MSMEs’ dependence on the informal lending sector, to which they earlier turned to, for quick, non-collateralised and customised loans. The technology architecture of GSTN, combined with the India Stack—an end-to-end digital architecture for cashless, presence-less and paperless transactions with a consent network on top—could help lenders bring down the cost of lending.
For borrowers, the ability to access formal sources of credit will reduce the cost of borrowing. This access to cheaper and more reliable credit will encourage more MSMEs to come on to the GSTN network and become a part of the formal economy. In turn, this will drive higher tax collections, thus helping both MSMEs and the larger economy as well.
However, many micro-entrepreneurs will still remain out of the ambit of GST because of the very nature of their business. Vegetable vendors, fruit sellers, newspaper vendors and other street-side micro-entrepreneurs will soon be able to leverage their transaction data through Unified Payment Interface (UPI) apps to access micro-loans.
When large networks such as Paytm, Reliance Jio, WhatsApp, Google, Ola, Uber and others come on board, the user base of UPI will expand rapidly. Micro-entrepreneurs who accept payments through UPI will build transaction histories that they can share with lenders.
UPI 2.0 (the second version of the interface) will allow users to download a digitally-signed copy of their transaction data and share it with lenders, thus opening up a new channel of data that can be the basis for lending.
GSTN and UPI will give users the ability to create digital transaction trails and monetize their data by accessing cheaper credit. Taken together, both these platforms will enable lending to the much neglected MSME sector and significantly accelerate the goal of financial inclusion.
The author is fellow and director (fintech) at iSPIRT.