From Compliance to Credit: Can Blockchain Help Small Businesses Break out of Informal Economy?

The evolution of a typical market in India has been striking. What began as a simple marketplace selling homegrown goods has now evolved into a complex network of online and offline channels with the aim to maximise sale capacity. We see even the smallest traders today accepting UPI and selling their goods through a WhatsApp Business account. Yet, the challenges remain familiar. The average traders struggle to prove their credibility, especially in comparison to big organisations with compliance officers, auditors, accountants, and many other facilities and experts at their disposal.

There is a solution to this conundrum, and it lies in a technology that has been in the spotlight these days – Blockchain. Yes, it is the force behind new-age digital assets like cryptocurrency, but its potential allows it to be leveraged in a host of more innovative ways. This technology can prove to be a great equaliser for the 63 million small and medium enterprises in India today.

The Digital Foundation for Formalisation

While SMEs form the backbone of our economy, with over 51% of them being registered in India’s tier 2 and 3 cities, most of them remain trapped in informal settings that greatly limit their growth potential. For example, a family owned kirana shop in a tier 3 city wouldn’t even dream about expanding into more locations across India, or international markets, due to the informal nature of their venture. 

The immutable ledger provided by the blockchain technology automatically formalises the venture of such SMEs. By creating tamper-proof, transparent records of every transaction made, inventory movements and business operations, blockchain helps SMEs in establishing a credible digital footprint that invites trust from financial institutions. Many fintech companies, both in India and abroad, are creating solutions to help small enterprises establish their credit worthiness by simply conducting business transparently. 

Another notable solution blockchain provides is the addition of smart contracts. These are a series of self-executing contracts written directly into code and can automate repetitive but important tasks like tax calculations, compliance requirements, and mandatory regulatory reporting. The technology can manage the verification and submission of documents and other important financial information, thus significantly reducing the time, effort and possibility of human error.

Revolutionising Access to Finance

Traditional financial models rely heavily on collateral and credit histories and are often the cause of SMEs not being able to grow despite the immense potential they hold. As per a report by Credable, only 14% of Indian SMEs currently have access to formal credit, leaving a massive financing gap that blockchain-enabled solutions can help bridge. 

Blockchain’s transformative potential is most evident in this domain. It allows these small businesses to show their credit worthiness in terms applicable to them, such as transaction history, inventory mapping, relationships within the supply chain as well as business performance metrics, all recorded on the immutable ledger. This also enables banking and non-banking institutions to assess creditworthiness more accurately.

Transforming Export Capabilities

Our SMEs make up almost 45% of India’s total exports. Yet, they face many hurdles to gain access to international markets directly. From complex documentation processes to lack of trust from buyers overseas, the opportunity to trade abroad without the need of middlemen often seems like a distant dream for them. This is another possible use case for blockchain. It can become a universal translator that speaks the language of transparency. 

Modern consumers in India, as well as abroad, are increasingly voting with their wallets for businesses that demonstrate ethical practices. Small businesses now have the opportunity to leverage this trend by proving their local sourcing and quality standards, just as effectively as multinational corporations, with the help of blockchain. International trade becomes easy when facilities like smart contracts automatically execute upon confirmation of payment, eliminating risks of uncertainty and traditional delays that can hamper business relationships. SMEs can also quote prices more competitively with the prior knowledge of payment delays and cash flow complications.

Blockchain also offers cryptographic security mechanisms that make it extremely difficult to manipulate records. Every transaction logged on the blockchain requires verification from multiple partners, thus alerting them in cases of fraudulent activity. For SMEs with intellectual property and digital assets, blockchain can timestamp and verify every interaction, thus creating a log that helps the company against counterfeiting and unauthorized copying. 

The adoption of this technology is on the rise. The Indian Government has also been extremely supportive with various policies that are aimed at increasing awareness, accelerating acceptance and reducing technological costs. We can be sure that SMEs equipped with new-age technologies will find themselves competing in global markets, accessing capital, and scaling their operations in ways that seemed impossible to us just a few years ago.

Now, the question is not whether blockchain technology will disrupt, but how many visionary entrepreneurs will see this disruption and adapt to it, and how quickly. 

While this transformation might seem like wishful thinking, we must not dismiss it. To turn blockchain from a technology of the future into a competitive advantage of today, we simply need to take initiative. India offers one of the most inventive fintech ecosystems in the world, along with an unmatched pool of software talent and entrepreneurs in the space who are continuously working to adapt these technologies to grassroot levels. We must support them in this endeavour to ensure blockchain becomes a catalyst for the growth of Indian SMEs worldwide.