Is BHIM The Next Stop For India’s Small Business Financing Push?

Could the next stop in this attempt be the BHIM application?

Launched in December 2016, in the aftermath of demonetisation, BHIM is essentially a money transfer application. However, tech advocacy group iSPIRT Foundation, is initiating a pilot project to see whether the application can be used to push financing to small business borrowers.

According to an internal iSPIRT presentation, existing financing platforms for MSMEs require extensive documentation and physical processes which "add speed bumps to the velocity of lending." Using BHIM could help remove some of these speed bumps, the foundation said. BloombergQuint has seen a copy of the presentation.

To be sure, the pilot project is so far a private experiment and has no government backing.

“iSPIRT is happy to claim that this presentation is in the ideation stage, and we are using this deck internally to get feedback. At this point, we hope that there will be a BHIM for Lending [application], but we have no visibility, if and when there will be one,” Sharad Sharma, co-founder of the think-tank told BloombergQuint.

"We are not aware about this. However if the requirement comes from the Reserve Bank of India or the Government, we will review," said Dilip Asbe, chief executive officer, National Payments Corporation of India, which developed the BHIM app.

BHIM For MSME Financing: How Will It Work?

Should the idea attract the interest of policymakers, how would it work?

According to the presentation, the application will provide MSME borrowers with an invoice financing facility which will be linked to their Goods and Services Tax Number and Enterprise ID.

The application will be able to generate lendable invoices for the merchant through the new e-invoicing and returns system. It would then ensure borrowers repay their loans on time through an e-liens or e-mandate facility.

Further, the application will allow MSME borrowers to share their cash-flow statements, bank statements and other documents with account aggregators, in a paperless, secure manner based on the Ministry of Electronics and Information Technology's consent framework, the presentation said.

Once this data for borrowers is available on the platform, lenders would be able to offer loan products to them, the presentation added.

Borrowers could accept a loan proposal, set up a e-lien facility for automatic repayments and have the loan disbursed directly to a bank account linked to the BHIM app.

The Practical Challenges

However, the idea of using BHIM for SME financing may face many practical challenges.

For one, GST data is not yet accessible through a direct interface with the GSTN, said Vivek Belgavi, partner and fintech leader, PwC India. “If the GSTN data is available through NPCI and through Account Aggregators, it becomes a game changer for lenders to access information via the consent framework,” Belgavi said.

A payment industry executive, who spoke on condition of anonymity, said that for the facility to take off, the RBI would first need to notify a separate mechanism for e-liens via the UPI platform.

Another industry expert, who also spoke on condition of anonymity, said that invoice financing through the platform may face its own set of challenges. Typically, invoice financing is done based on the credit worthiness of the entity who is to make the final payment on an invoice. However, since a BHIM-driven platform would mostly be able to provide data of the small business that needs to raise finance against an invoice, lenders may be reluctant, this person said.

According to Belgavi, an addition of a financing or lending feature to BHIM should be seen as a catalyst for innovation.

“This model or application should be seen as a catalyst for innovation and not the end-state, just as BHIM was initially launched to showcase the capability of UPI. Since then, however, the rest of the ecosystem, from banks to payment companies, have integrated UPI onto their applications,” Belgavi said.

Next Steps Before Launch

The iSPIRT Foundation, itself, lists out a number of enabling steps that are needed before lending facilities on BHIM can be added.

The include:

• Popularising the account aggregator system
• Introducing the e-lien facility on UPI for recurring loan repayments
• Defining treatment of invoice financing loans that become non-performing assets
• Introduction of a ‘Universal Enterprise ID’ for all MSMEs, which can be linked to the borrowers’ Permanent Account Number as recommended by the UK Sinha Committee.

For now, iSPIRT will launch a pilot program on Oct. 27 this year, while the BHIM for Lending application could be launched by Dec. 30, the presentation said.