GST to spur explosion in credit to small businesses

KOCHI: The goods and services tax (GST) system will pave the way for an explosion in credit to small businesses in India as the banks will look more favourably at loan proposals as they can have access to authentic data on business turnover of small players in the market.

Historically, banks had been turning their back on requests for credit from small businesses as they were ill-equipped with proof for their business turnover as on the one hand, it is impractical for these small businesses to produce audited reports prepared by reputed firms and on the other, banks tend to distrust the accounts presented by these small players for want of authenticity.

“Now that 10 million businesses will have data of their business performance in a government audited system and the companies can now offer this data to any financial institutions to prove business performance – which will be a proof of their business transactions,” said Nanden Nilekani, Infosys chairman and former chairman of Unique Identification Authority of India (UIDAI).

If needed, the lenders can call for break-up of these data for different periods such as daily, weekly, monthly or annual as they wish and these figures are certified by the GST system.

Talking to, former credit manager of a private sector bank acknowledged that getting reliable business data has always been the predominant hurdle for sanctioning loans to small businesses compared with their larger counterparts.

“Now the banks are keen to lend to small businesses in the new context of larger loans turning bad, leaving many banks high and dry. I believe if the small businesses can present the GST authenticated turnover figures banks should be more than happy to lend to them,” he added. With businesses getting registered with GST, all are going to upload their invoices onto the GST system – billions of invoices.

More importantly, all businesses will be forced to upload their invoices as they will be eligible to get credit  for what they buy (raw materials in case  of manufacturing units) only if they get hold of the invoices from their seller. “Thus this creates an interlocking system of compliance, which helps government in raising more revenue,” said Nilekani.

The GST system will open up a new world of credit where small businesses will see the democratization of access to credit. The basis of credit will cease to be recommendations from higher-ups and rather will depend on authentic data certified by a system that is part of Indian Government.

Nilekani said this would have a massive implication on the economy. Interestingly, the bankers aver that there can’t be a better time like now, as most banks have decided to go slow on larger unsecured loans and have started looking seriously at proposals from small to medium businesses.

India is creating a data infrastructure and every individual or business will be empowered with his data that is readily available and authenticated.

The whole thing is going to be part of the data empowerment architecture and India is set to become the first country to have a data empowerment architecture of this scale.

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