A 2022 study by the Indian Institute of Banking & Finance showed that only 37% of MSMEs had the necessary funds to finance the next stage of their business or the knowledge of different government schemes that they were eligible to undertake. In order to mitigate the problem of adequate financing, ONDC was set up—a revolutionary platform transforming the digital commerce environment. It endeavours to provide fair access to MSMEs with a full-fledged digital marketplace, which includes access to financing and platformization of products and services.
A 2022 study by the Indian Institute of Banking & Finance showed that only 37% of MSMEs had the necessary funds to finance the next stage of their business or the knowledge of different government schemes that they were eligible to undertake. In order to mitigate the problem of adequate financing, ONDC was set up—a revolutionary platform transforming the digital commerce environment. It endeavours to provide fair access to MSMEs with a full-fledged digital marketplace, which includes access to financing and platformization of products and services.
The Open Network for Digital Commerce (ONDC) is an initiative of the Indian government that provides a unified digital platform for B2B e-commerce. It aims to ensure transparency and inclusivity while bringing about efficiency in digital commerce transactions, thus completely transforming the digital commerce ecosystem across India.
With ONDC, MSMEs can enhance their operational efficiency, get easy access to loans, and become active players in the digital economy. ONDC can bridge the credit gap for MSME owners by offering fair access to finance and also integrating financial institutions into one digital platform. By leveraging their digital footprint, MSMEs can demonstrate their creditworthiness faster, streamlining the loan application process and ensuring easy access to funding. This transparency and accessibility significantly reduce the burdens of fundraising challenges, making it a viable alternative for MSMEs to access credit.
MSMEs often suffer from low credit ratings. This makes them a high-risk sector for banks. This is despite the fact that MSMEs contribute significantly to the overall economic growth of the nation. Due to the higher risk of liability, banks have to apply stricter regulations on MSMEs.
For MSMEs, the process often includes complex documentation, the need for collateral, strict repayment terms, and high-interest rates. Such requirements are a deterrent to MSMEs securing a loan from a bank.
As the role of a supplier to big corporations, MSMEs often have to rely on the success of these enterprises and the credit payment terms set by them.
Due to the unfavourable payment terms, MSMEs often have to deal with significant liquidity problems. These are brought on by a decrease in cash inflow due to customer service interruptions or payment delays. The majority of an MSME’s capital is allocated to daily operations, which leaves them tight for cash in the event that payments are late.
To access sufficient capital to keep operations running uninterrupted, MSMEs look for the most convenient and easy source of funding. Since MSMEs only focus on financing everyday activities, they do not have sufficient funds for long-term investments that can grow their businesses.
Even with government MSME initiatives aimed at streamlining MSME financing, a majority of regulatory gaps remain in this industry. MSMEs are unable to obtain timely financing due to outdated regulatory requirements.
These regulations make it more difficult for MSMEs to carry out tax assessments, obtain insurance, and obtain business licenses. Many MSMEs lack the skills necessary to use online platforms for carrying out regulatory transactions, particularly those located in rural areas.
This makes the regulatory issues worse and deters the expansion of small businesses. Many small businesses struggle to obtain new technology and equipment, hire experienced workers, or even acquire raw materials on time because of the drawn-out process of obtaining funding.
With the launch of its financial services, which includes lending, ONDC has demonstrated itself to be a potentially transformative force in tackling the problems MSMEs face. Here is how ONDC does it:
The platform establishes a direct connection between banks and MSMEs, allowing banks to join as seller applications on the platform. This way, banks can connect with MSMEs and have the chance to build a long-term partnership to enhance lending accessibility to MSMEs.
ONDC is a data-driven network that provides buyers and sellers with secure access to information. Accurate credit assessment for MSMEs, especially those with little credit history, is achieved by the abundance of data, which includes robust GST and sales data. This simplifies the funding process for small businesses by doing away with the requirement for extensive documentation.
The price evaluation process, coupled with low-risk credit, attracts more lenders to join ONDC’s platform. With the increase in the number of loans, MSMEs now have access to a wider range of credit options, giving them access to more cash and flexibility. Therefore, ONDC is a catalyst for promoting financial inclusion among MSMEs and increasing the availability of loans.
Detailed ONDC data minimizes the lender’s hesitation to finance MSMEs. By using this data, lenders can assess a borrower’s creditworthiness more accurately, which is helpful in determining whether MSMEs are eligible for a loan. Additionally, the lower operational expenses associated with digital underwriting minimize accrual time and cost. This increases the appeal of high-risk loans, transforming them into potentially profitable investments for lenders.
The ONDC promises to be a viable way to bridge the credit gap for MSMEs in India. Via the use of innovation and technology, ONDC seeks to promote financial inclusion across the country, provide MSMEs with fair access to credit, and increase transparency and accountability within the lending sector. As ONDC grows its scope, it has the power to enhance support and boost MSME growth and prosperity, thereby further propelling India’s economic development and inclusiveness.
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