ONDC’s case for financial inclusion: Can the network bridge the MSME credit gap?

MSMEs make up a sizable portion of India’s economy. In 2021-22, the industry contributed to 29% of India’s GDP. And 96% of the country’s industrial units belong to small companies. Despite these impressive statistics, MSMEs have been plagued with problems of exclusion—including in the financial sphere. For perspective, only 14% of 64 million MSMEs are reported to have access to credit.

This credit gap, upon closer inspection, is systemic—one that’s attributed to constraints on the part of both the borrowers (i.e., MSMEs) and financial institutions (in this context, lenders):

Accessibility: A (business) loan application typically requires borrowers to approach an institution. As for lenders, they seldom go where their borrowers are—more so in the case of a high-risk cohort like small businesses. Accessibility issues may also arise out of the lack of awareness on the part of small businesses, leaving many to resort to unorganised and unregulated sources of financing.

Lack of data: Institutions looking to lend need data—credit history among others—while assessing borrowers’ creditworthiness, which MSMEs typically lack.

Ticket size and scalability: Lenders look at the scalability of business while lending to borrower cohorts. MSMEs (especially those who are in need of significantly smaller ticket-size loans) aren’t the most lucrative market to lend to, owing to their high-risk, unorganised nature, and thin credit-history files.

While attempts have been made to support the credit-starved sector, the gap is far from bridged. A report by Avendus Capital pegs the credit gap at a whopping USD 530 billion.

Enter ONDC

ONDC envisions bringing 6 to 7 times more MSMEs and connecting 80-90 million self employed workers to the digital commerce ecosystem. And with its recent rollout of financial services ( including credit), can the network serve as a platform that addresses the aforementioned challenges that contribute to the credit gap? Let’s take a look:

An accessible channel to avail and disburse credit: Banks can now get onboard as seller apps on ONDC. This means that they can now easily reach MSMEs on a platform where the latter actively participate, solving for the problem of accessibility for both parties.

Free-flowing and easily accessible data: One of the main selling points for ONDC to rope in financial services onto the network was the promise of data accessibility. The network is decentralised, giving access to data to both buyers and sellers. Banks and NBFCs can now use their data on ONDC platforms — like GST and sales — to underwrite MSMEs customers. The data is accurate and robust, giving lenders the confidence to extend credit even to thin-file and NTC proprietors. As for small businesses, this eases their burden of proving creditworthiness, while also helping them avail credit with very little to no (physical) documents.

Viability of lending: The accessibility of data for underwriting makes lending scaleable for institutions. The reliable and accurate source data for credit assessment gives lenders the confidence to lend to a sector that’s otherwise considered risky business. The availability of key data, coupled with the reduced digital-underwriting costs also makes lending to a high-risk cohort a low-cost, high-returns operation, encouraging more lenders to provide more credit to MSMEs.

In conclusion

The financial exclusion of MSMEs has long been a complex problem that several parties, from government bodies to fintechs, have been trying to solve. ONDC seems to be a promising start that can tackle both digital and financial inclusion if the network takes off through active participation of these varied ecosystems.

Views are personal. The author is Co-Founder & CEO, FinBox.