Technology for MSMEs: Blockchain has the potential to improve security, enhance efficiency and reduce costs when it comes to receivable financing. This could particularly be good news for MSMEs that face significant hurdles in accessing credit. Let us see how.
As per RBI
Also Read: SMEs are losing confidence as sales decline and profits shrink: ASSOCHAM and D&B survey
Blockchain consists of numerous blocks of data, which in turn are stored across nodes. Data that is stored across a network of nodes is more difficult to hack into than data that is stored at a central location. Even if fraudsters hack into some nodes and alter the data, it would give rise to suspicion as the data would differ from other copies across the network. The ability to automatically identify suspect data helps to streamline the receivables transactions. There is no need to manually track or navigate paper trails and emails.
Another area where it can help is in reducing paper work. Each transaction in trade finance requires authentication and that can give rise to a lot of paperwork and delays. However, blockchain uses digital tokens. Each participant in the supply chain is issued a token to authenticate the movement of goods. In this process, it becomes harder to steal or hack such tokens compared to paper or digital files. It also allows all parties to track and receive information about traded goods, monitor the process and verify completion of steps in real time. This reduces risk to the lender and brings about transparency.
All involved parties can thus remain aligned and be in a position to access the most up to date information. Here is where smart contracts can play an important role. Smart contracts are developed on blockchain to automate one-time or recurring transactions without any human intervention. Since they are built into blockchain to execute contracts with pre-set conditions, these contracts can be carried out as soon as the conditions are met, there are no required follow-ups or delays, or the requirement of third-party trusted entities to do follow-ups.
Also Read: No proposal to implement MSME rating system: MSME ministry
A 2019 report on fintech by the Department of Economic Affairs, Ministry of Finance, said that blockchain technology is helping solve the problem of double discounting and transparency of invoices in trade finance through RBI’s Trade Receivables Discounting System (TReDS) scheme, thereby reducing the cost of credit, as all transactions on the ledger are verified and transparent.
At the same time, it also provides confidence to the financier that there is very less probability of invoice-related fraud. Also, there are multiple issues that are associated with receivable financing, namely falsified receivables, multiple invoices secured against the same collateral and so on. Use of blockchain can increase transparency, security, and allow for real time merchant tracking.
A large number of intermediaries and corresponding administrative costs affect MSMEs the most as it makes MSME financing less attractive to banks. Improved security and enhanced efficiency essentially help to lower costs. With increased efficiency, parties can engage in greater volumes of deals with more clients, while a stronger security means that fewer of these deals have a chance to be compromised. When it comes to trade receivables, a lot of time can be wasted in reconciling the data of the supplier with that of the buyer. When all parties concerned have access to a single source of information, the need to constantly verify and reconcile transactions is reduced and this further helps in lowering costs.
Anurag Chaturvedi is the CTO of M1xchange. Views expressed are the author’s own.
Subscribe to Financial Express SME (FE Aspire) newsletter now: Your weekly dose of news, views, and updates from the world of micro, small, and medium enterprises