Transforming MSME Finance: G20's Push for Open Banking Systems and India's Innovative Solutions

The G20 is promoting open banking systems to enhance financial access for MSMEs, addressing challenges such as inadequate collateral and high transaction costs. India's Account Aggregator network exemplifies this approach, enabling secure data sharing and improving credit access for MSMEs.

Micro, small, and medium-sized enterprises (MSMEs) form the backbone of economies worldwide, representing 60% of employment and 95% of all companies globally. Despite their significant contribution, MSMEs face substantial challenges in accessing finance due to inadequate collateral, difficulties in verifying creditworthiness, and high transaction costs. According to researchers Radhicka Kapoor and Tanu M. Goyal from the Indian Council for Research on International Economic Relations (ICRIER), in developing countries, these enterprises account for almost 35% of GDP and 50% in developed nations. Yet, credit constraints are more severe for MSMEs than for larger firms, with an estimated finance gap of 5.2 dollar trillion in 128 developing economies. This significant gap underscores the need for innovative solutions to enhance financial access for these crucial sectors.

G20's Push for Innovative Financial Solutions

The G20 has prioritized enhancing financial access for MSMEs through innovative methods, particularly in low-income and developing countries. Open banking systems, which enable the secure sharing of financial information through APIs, present a promising solution. These systems can lower fees, provide better interest rates, and offer more customized financial products for MSMEs. By allowing third-party access to financial data with individual consent, open banking can significantly impact MSMEs' access to credit and services. The importance of digital public infrastructure (DPI) in facilitating data exchange is highlighted through examples like India's Account Aggregator (AA) network. This system, launched in 2021, allows individuals and MSMEs to securely share their financial information across institutions, improving access to credit by filling information gaps. The AA network has enabled MSMEs to access unsecured business loans more easily, thus enhancing their financial inclusion and competitiveness.

India’s Account Aggregator Network: A Game-Changer

India's AA network, regulated by the central bank, has proven to be a pivotal development in improving MSME access to finance. This system allows customers to digitally access and share their financial data securely across various institutions. Customers retain control over their data, with the ability to consent to data sharing, revoke consent, or change access periods. The AA network operates as a conduit for facilitating the flow of encrypted data, ensuring privacy and security. The first phase of the AA rollout in India showed positive outcomes, with 38% of unsecured business loans disbursed to MSMEs. This network has reduced the cost of doing business, minimized paperwork, and enabled quick loan approvals through a fully digital process. By December 2023, 1.94 billion cumulative accounts were enabled for data sharing through the AA system, demonstrating significant growth and adoption.

Enhancing Competitiveness Among Lenders

The AA network also enhances competitiveness among regulated lenders by leveling the playing field between banks and non-banking financial companies. Banks typically have an advantage due to their access to day-to-day cash flow information from business accounts. However, with the integration of the Goods and Services Tax Network (GSTN) into the AA framework, lenders can obtain vital insights into an enterprise's cash flows. This additional information helps in evaluating MSMEs' creditworthiness and creating customized loan offerings based on risk profiles. The AA network's ability to provide small loans, even as low as Rs.160 (1.80 dollar), highlights its potential to cater to diverse financial needs within the MSME sector.

A Holistic Approach to Financial Ecosystem Enhancement

Beyond facilitating simple and secure credit access, the AA network's success also lies in its capacity to aggregate data from various sources, enhancing the overall financial ecosystem. The integration of GSTN data into the AA network is a significant step in this direction, providing comprehensive cash flow information crucial for credit assessments. This holistic approach not only improves MSME access to finance but also fosters a competitive lending environment, benefiting both borrowers and lenders.

Empowering MSMEs through Knowledge Sharing and Literacy

The G20, under the Brazilian presidency, is encouraged to foster knowledge sharing on the design, development, and operations of open banking systems. This includes standardizing templates for data sharing to facilitate cross-border financial access and integrating e-commerce transaction data to expand financial information sources for MSMEs. The goal is to create a comprehensive network that can leverage the digital footprint of MSMEs, enabling creditors to assess cash flows and risk profiles accurately. This shift from physical to information collateral is critical for enhancing MSME access to finance.

Digital and financial literacy is another crucial aspect for the effective adoption of open banking systems. MSMEs need to be empowered with the knowledge to use these systems, which can significantly expand their access to financial services. The G20 must reaffirm its commitment to advancing digital and financial literacy to ensure that MSMEs are aware of and can utilize available financial products and services. This holistic approach to improving MSME access to finance through open banking systems and digital public infrastructure can have far-reaching impacts on their ability to secure better financing options and grow their businesses. The continued evolution and adoption of open banking systems globally promise to address the financial information gap faced by MSMEs, fostering economic growth and resilience across developing and developed nations alike.