DLT to transform MSME financing into a super-efficient ecosystem

DLT to transform MSME financing into a super-efficient ecosystem

Lack of access to faster and affordable finance continues to be a critical barrier to the growth of our MSMEs. Both Micro and Small enterprises, often, struggle to get financing as they fail to maintain comprehensive documentation and credit history (as required by Banks and Financial institutions). But this situation is likely to become a thing of the past, as the application of decentralized technologies such as blockchain and DLT in financing Tech within TechStack is becoming mainstream. DLT, the prominent decentralised technology can play a significant role in digitising MSME Financing – this means the complexity of today’s documentation processes, limited access to loans/financing and the risk of fraud would largely be minimised. By streamlining KYC processes, leveraging Smart Contracts, enhancing credit scoring, improving supply chain financing, and facilitating cross-border transactions, DLT can create a far more efficient financing ecosystem for MSMEs.

What is DLT – Distributed Ledger Technology

Distributed Ledger Technology (DLT) is a decentralized digital network of records that can be simultaneously accessed by all permitted users, and are automatically updated and validated when an authorized change is made. Every update is time-stamped and all DLT transactions run on consensus, replication and immutability, in a tamper-proof highly secure ecosystem. 

DLT to transform MSME Financing – Lets see what kind of efficiencies it can bring to MSME financing

1. DLT ensures faster disbursement of financing or loans

DLT enables the use of Smart Contracts, which primarily are self-executing contracts with pre-agreed terms and rules. These Smart Contracts on DLT automate time-consuming practices in MSME financing like verification of documents, payment processing, compliance checks, interest payments, etc. This automation streamlines processes, accelerates transaction timelines, and leads to faster loan decisions & approval, and disbursement of funds.

2. DLT is a game-changer in comparison with Centralized Databases 

Unlike centralized databases controlled by a single entity, DLT distributes information across a network, thus ensuring no single point of failure.

Security : Minimized risk of hacking or unauthorised access.

Accessibility: Real-time access for all parties, and thus improving collaboration.

Integrity: Information is validated by multiple parties, and thus preserving data integrity.

Agility: Quicker and more efficient processes, especially very helpful for MSMEs.

3. DLT enables stronger Credit scoring and accurate Risk-assessment of MSMEs

Conventional credit scoring processes often struggle to arrive at the creditworthiness of MSMEs, especially of those who don’t have organized credit history. DLT enables the creation of decentralized and tamper-proof credit profiles for MSMEs, with data gathered from various sources like transaction history, supply chain relationships, payment behavior, and social media etc. Such comprehensive credit history provides financiers with a more accurate assessment of loan seekers, who can take better-informed loan decisions. 

4. DLT enhances Trust through higher Transparency and Security

Trust is the foundation of trade or MSME finance. DLT’s transparent and immutable ledger ensures that all parties have access to the same information that cannot be changed, altered or tampered with. And through this, it creates and sustains an incredible level  of trust and confidence among MSMEs, banks, and other stakeholders. This level of transparency and security also minimizes the risk of fraud, discrepancies, and disputes.

5. DLT powers MSMEs’ Global Competitiveness 

DLT empowers MSMEs with tools to expand their trade horizons. With secure and transparent transactions, they can compete globally, participate in international trade more easily, access finance more easily, and expand their business. On the other hand, banks can provide value added services and personalized offerings, and build deeper relationships with their clients, in the process.

As you can see, DLT would build efficiencies at every level and point of MSME financing. By addressing various limitations of centralized databases and traditional processes, DLT is poised to transform MSME Financing into a super efficient ecosystem where trust is ensured, finances are faster and secure, and collaborations are seamless and global.

How is ProFinTech leveraging DLT 

1. Innovative bespoke solutions for MSMEs and Financiers

Our ProFinTech platform leverages DLT to offer innovative tailored solutions within the complex world of MSME finance. From creating solutions that address distinctly nuanced trade cycles of a specific industry to devising secure escrow agreements to handling intricate settlement scenarios, we bridge the gap between conventional practices and the emerging cutting-edge technology.

2. Legal compliance and Document generation 

Our ProFinTech platform ensures compliance with regional regulations and offers on-the-fly generation of essential legal documents such as escrow agreements, endorsement policies, and dispute resolution agreements. This integration further streamlines the trade process, ensuring legal conformity and efficiency.

3. Automation of Processes

We are engaging with features of Web 2.5 – the convergence of Web 2.0 and Web 3.0 technologies, in order to facilitate automation in some crucial processes within MSME or Trade financing. Web 2.5 enables communication between legacy web applications and blockchain applications, and allows us to create more seamless, customized and secure customer experiences – like decentralized finance (DeFi) space for MSMEs.

If you want to know more about our Tech-stack powered by DLT and Blockchain technology and how we are creating a more secure, efficient ecosystem for MSMEs, Banks and other parties involved in MSME financing, do connect with us. We would love to have a conversation with you.

Written by Vishnu Rajesh, Jyothsna. ChatGPT and Google came in handy as sources.

Connect with us

To learn more about ProFinTech and our innovations in trade finance, connect with us at info@profintech.in