Formalisation to financing: Understanding digital public infrastructure’s role in bridging MSME gaps – SME News

Dr Ishita G. Tripathy

The significance of the MSME sector in India is amply demonstrated by its contribution to gross value added, employment generation and exports. The heightened role of Digital Public Infrastructure (DPI) has the potential to positively transform the MSME sector, underscoring accessibility and transparency, besides easing doing business. DPI is an important instrument in addressing information asymmetry and enabling MSME financing.

Currently, the digital identity of an enterprise is established at the time of registration on the Udyam Registration Portal (URP) or Udyam Assist Platform (UAP). Documents related to enterprises are stored and shared digitally through DigiLocker. Unified Payments Interface ensures seamless digital payments. Besides, account aggregators help in aggregating financial information on a single platform. GST Sahay uses invoice data to assess eligibility for loans, especially for MSMEs. MSMEs can get their bills discounted through the Trade Receivables Discounting System.

Further, SIDBI’s recent survey report of May 2025 indicates that 90% of the respondents reported accepting digital payments, reflecting progress in digitalisation. DPI not only provides MSMEs access to services and digital lending, but also provides a mechanism for redressing grievances.

Formalisation

Government of India has adopted a multi-pronged strategy for financing MSMEs. Formalisation is an integral part of that strategy. Resultantly, the number of registered MSMEs increased from 16 million in April, 2023 to 64 million in June, 2025. There are two ways in which enterprises can get registered. The first is on URP by the enterprise itself, wherein information is pulled from the income tax database through PAN and the second way is on UAP where information about the enterprise is filled in by his or her lender, the common identifier being Aadhaar. Typically, the second way of registration is effective in capturing information about tiniest of micro enterprises which are outside the GST regime.

Integration of the two URP and UAP databases will preclude duplication and can also be used for upgrading UAP holders to URP, marking their transition from an informal to a formal economy. Three achievable DPI interventions required for ensuring appropriate policy formulation for the sector are to make URP the ‘KYC’ for all MSMEs, offer credit options at the time of registration by linking URP with databases of financial institutions and Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), and link Udyam with IEC codes of exporting MSMEs.

Bridging the Credit Gap

Bridging the formalization gap is also a step towards bridging the MSME credit gap. MSME credit grew 13% in the last one year vis-à-vis 6% growth for large enterprises. Credit to the MSME sector over the past 10 years has tripled to Rs 30 trillion. The growth of guaranteed credit has been a consequence of a number of interventions, which can be categorized under 7As.

The first A is Availability of credit. An example is the Credit Guarantee Scheme (CGS) for Micro and Small Enterprises (MSEs), under which the ceiling on the guaranteed amount has recently been doubled to Rs 10 crore and guarantees extended can go up to 90%.

Reinforcing the second A, Accessibility, the number of member lending institutions under CGS has rapidly increased from 126 in 2020 to 276 in 2025. To make credit more Affordable, the third A, the annual guarantee fees charged under CGS has been slashed by 50%. To reach out to enterprises, and to let them know about financial literacy and credit discipline, what is needed is the fourth A, Awareness.

For awareness generation about policies and to receive feedback on ongoing policies, it is important to have the fifth A, Alliance with all stakeholders. The sixth A, Accountability, needs to be maintained to ascertain that benefits percolate to the targeted beneficiaries. The last A, Achievements are important to be celebrated because of peer-to-peer learning and demonstration impact. CGTMSE is doing exactly that after having completed 25 years of guaranteeing loans of MSEs. 

PM Vishwakarma: A Case Study

A microcosm of MSME initiatives is the 20-month-old PM Vishwakarma Scheme, being implemented by the central Government to help traditional artisans and craftspeople in setting up their own enterprises. Launched in 2023, the intended number of beneficiaries to be covered in 5 years is 3 million. The Scheme has received an overwhelming response and already 2.9 million beneficiaries have registered. The digital identity of these beneficiaries is established through Aadhaar-based biometrics.

All benefits of this scheme flow through a single portal, which is accessed by 3.7 million stakeholders including beneficiaries, financial institutions, skilling centres, ministries and departments. On completion of their skill training, beneficiaries receive e-vouchers worth Rs. 15,000 for toolkits which are delivered at their residence. Redemption of the e-voucher is done by postmen at the residence of the artisan during toolkit delivery. Successful redemption triggers payments to vendors of toolkits.

After skill training, beneficiaries can take collateral free loans, guaranteed by CGTMSE, up to Rs. 3 lakh at 5% rate of interest. Interest subvention by Government of India is upto 8%. Beneficiaries are encouraged to adopt digital transactions and market their products and services on e-commerce platforms. The sheer number of enterprises indicates that MSME financing requires coordinated response of a large number of stakeholders. Effective utilization of DPI and digital footprints of MSMEs make it easier for them to access credit.

Dr. Ishita G. Tripathy is an officer of the Indian Economic Service. Views expressed are personal. Reproducing this content without permission is prohibited.

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