Unlocking MSME Potential: How ULI (Unified Lending Interface) can potentially transform the $300 billion credit gap of India's most underrated sector?

As of July 2024, the Micro, Small, and Medium Enterprises (MSME) sector in India employs 202 million people, marking a 66% increase from the previous fiscal year. This sector is critical to the Indian economy, contributing approximately 30% to the nation's GDP and 45% to its total exports.

Despite its economic significance, MSMEs face significant challenges, particularly in accessing formal credit. A massive credit gap of over $300 billion forces many MSMEs to rely on informal, high-cost financing sources, which hampers their growth potential. This underscores the need for improved financial access and transparency.

The soon to be launched Unified Ledger Infrastructure (ULI) has the potential to transform the MSME sector by addressing these challenges by a structured approach in meeting their business requirements.

Streamlining Credit Access

ULI will enable seamless, consent-based sharing of digital data such as financial records, tax filings, and land records. This centralised platform will provide lenders with a single access point for MSME information, significantly reducing loan approval times from the current 7-8 days to real-time or near-instantaneous decisions. Faster credit access will help MSMEs manage liquidity challenges, reduce administrative costs, and make borrowing more affordable.

Strengthening Procurement and Working Capital

MSMEs often face delays in procuring raw materials due to a lack of working capital, which disrupts production cycles. With ULI, lenders could offer instant credit lines to MSMEs, ensuring timely procurement of materials and better management of working capital. This would reduce the financial stress on MSMEs and enhance their operational efficiency. Improved cash flow and procurement processes would enable MSMEs to maintain smooth operations, reduce downtime, and meet market demand more effectively.

Single Interface for Credit Access

A major barrier for MSMEs in accessing formal credit is the complexity of documentation and limited awareness of available financial solutions. ULI will act as a unified platform where MSMEs can apply for credit from multiple lenders, providing borrowers with transparent information on loan products, interest rates, and terms. This will enable MSMEs to compare and select the best options, reducing information asymmetry and fostering a competitive lending environment. As a result, lenders will be encouraged to offer better rates and terms, ultimately lowering borrowing costs for MSMEs.

Reducing Informal Borrowing and Formalising the Sector

ULI would help reduce the dependence of MSMEs on informal credit sources by making formal financial options more accessible. It would also support the formalisation of the sector by providing transparent and verifiable data, making it easier for MSMEs to meet lender requirements and benefit from government schemes. Formalization would lower borrowing costs, reduce risks, and create new opportunities for MSMEs, enhancing their financial stability and growth potential.

In summary, ULI stands poised to revolutionise the MSME sector, transforming how businesses access credit by streamlining processes, reducing borrowing costs, and fostering unprecedented financial transparency. This game-changing shift promises not only to elevate the financial well-being of MSMEs but to amplify their role as a driving force in the Indian economy. By unlocking broader access to credit, ULI will propel the nation closer to realising the ambitious vision of a $1 trillion MSME-powered economy.

If you are building or working in the MSME lending landscape in India, we would love to connect and understand your thoughts.

Author: Amrit Panigraphi (IB Analyst)