Digital public infrastructure can boost access to finance for SMEs: World Bank G20 report
According to the report, about half of formal MSMEs lack access to formal credit. It outlined five key ways in which DPIs can be leveraged to empower SMEs.
In a recent G20 policy recommendation paper on 'advancing financial inclusion and productivity gains' World Bank highlighted how digital public infrastructure (DPI) can address the issues of lack of access to credit faced by micro, small and medium enterprises (MSMEs).
SMEs (small and medium enterprises) often grapple with financial accessibility, particularly in developing nations where financial systems may be underdeveloped. According to the report, about half of formal MSMEs lack access to formal credit and they resort instead to internal funds or assistance from friends and family to start and sustain their businesses.
It indicated that in emerging markets, roughly 41% of formal MSMEs face unmet financing needs, with the finance gap for formal MSMEs in developing economies estimated at $5 trillion. Women-owned businesses comprise 23% of MSMEs and account for 32% of the MSME finance gap.
The report, prepared by the World Bank, with guidance and inputs from the G20 India Presidency represented by the Ministry of Finance and the Reserve Bank of India, presented DPIs as a potential solution to these challenges. The DPIs can offer SMEs access to financial services and information through digital channels.
The document outlines five key ways in which DPIs can be leveraged to empower SMEs:
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Digital payment systems
DPIs enable MSMEs to accept electronic payments, reducing reliance on cash transactions and facilitating better tracking of revenue and expenses. Furthermore, digital payment systems aid in establishing a credit history—a critical factor for accessing formal financial sources like bank loans. DPIs generate rich data on cash flows and business performance of active MSMEs, which can then be used by credit providers to assess relative creditworthiness.
Data exchange
DPIs facilitate the seamless sharing of information from traditional sources. This streamlines the assessment of creditworthiness for MSMEs and enhances their access to formal finance. Digital credit reporting systems are especially beneficial in developing countries, where traditional credit reporting systems may be less developed.
Alternative data sources
DPIs can harness alternative data sources and big-data analytics to provide information for the credit risk-assessment process for MSMEs. Data from mobile phone call records, utility payments, digital transactions, social media, and industry data can be employed for this purpose.
For instance, companies like LenddoEFL in Singapore use psychometric tests as part of their credit-scoring models, while MYBank in China employs AI-powered risk-management systems.
Collateral diversification
The combined use of data exchange and digital payments can offer alternative collateral options for MSMEs. For example, digital records of an MSME retailer's payment receipts can serve as collateral, enabling merchant receivables financing.
Financial education
DPIs can play a role in educating and informing SMEs about various financial products and services. Digital platforms can disseminate information about loans, interest rates, and repayment terms, and offer training on financial management.
The Indian government has taken significant steps to develop a robust digital public goods infrastructure. Some examples include UPI (Unified Payments Interface), Jan Dhan, Aadhar, and .
Edited by Kanishk Singh