RBI urges small businesses to adopt UPI, digital payments

Getting your Trinity Audio player ready...

The Reserve Bank of India (RBI) has suggested micro, small, and medium enterprises (MSMEs) adopt digital payment systems like the Unified Payments Interface (UPI) and online banking to create a digital footprint for financial transactions. This is expected to make it easier for lenders to assess the firm’s financials and reduce the credit gap. 

“While regulatory policies and government schemes have played a crucial role in creating an enabling environment for MSMEs, it is equally important for MSMEs to take proactive steps to build trust and enhance their visibility with lenders,” Shri Swaminathan J, a deputy governor of RBI, said at the CEO Forum of the Federation of Telangana Chambers of Commerce and Industry.

MSME is a sector in the Indian economy that includes startups and small businesses with limited budgets and operations. MSMEs contribute nearly a third of India’s nominal gross domestic product (GDP) and account for over 40% of the country’s exports, Swaminathan said in his speech. 

“Along with formalization, adopting digital payment systems like UPI and online banking creates a digital footprint of financial transactions, making it easier for lenders to assess financials of the firm. Digital payments also improve cash flow management, offering MSMEs greater control over their finances and helping them maintain a clear financial record,” Swaminathan added.

According to RBI’s August report, India’s UPI has emerged as the preferred retail payment method. The UPI has seen a tenfold increase in volume over the past four years, from 12.5 billion transactions in 2019-20 to 131 billion transactions in 2023-24, or 80% of all digital payment volumes.

Swaminathan said the MSME sector plays a vital role in the Indian economy, driving entrepreneurship and creating substantial employment opportunities. These enterprises are essential support units for larger industries and contribute significantly to the secondary and tertiary sectors. 

“More importantly, they play a crucial role in employment, generating over 22 crore jobs (220 million) and holding immense potential to harness India’s demographic dividend. Thus, the MSME sector not only powers economic growth but also uplifts the poor, providing livelihoods and fostering inclusive development across the nation,” he informed.

Despite its pivotal role in driving economic growth, the sector faces numerous challenges, including low technology adoption. The RBI has taken significant steps to address these issues, promoting financial inclusion and advocating for digitalization, Swaminathan said.

A common grouse from this sector is that they find it difficult to secure timely and adequate formal credit. Swaminathan said that this challenge may be due to several factors, including the fact that many MSMEs lack comprehensive financial records or credit scores. In some cases, they may not have sufficient collateral to support the scale of financing they require. 

Unified Lending Interface to tackle delayed payment

To address the issue of delayed payment to MSMEs, RBI has introduced several innovations, including the Unified Lending Interface (ULI). Launched as a pilot program in August 2023, ULI allows MSMEs to access tailored, frictionless credit using digital data, Swaminathan said. 

RBI’s ULI, expected to transform credit delivery in the country completely, is a technology platform built to facilitate access to authenticated data from various sources through a standardized Application Programming Interface (API) to which all lenders can connect seamlessly through a plug-and-play model.

As part of RBI’s strategy to improve digital public infrastructure in India, the ULI facility would allow credit to farmers and borrowers of MSMEs. ULI is also designed to unlock critical financial, non-financial, and alternate data for banks, including digitized state land records, milk pouring data from milk federations, satellite data, and property search services, through a single interface.

Banks can access information from all these sources through a single integration with the platform, eliminating the need for multiple bilateral integrations with each data and service provider.

“With improved access to finance, MSMEs will be better positioned to drive innovation, create jobs, and uplift communities across the country. This is a critical step towards building a more inclusive and sustainable future for India,” Swaminathan said.

Watch: New age of payment solutions