A lender assessing a large company can draw on audited accounts, established financial histories, credit records and other documented information. A smaller firm may offer much less information to work with. Its business may be perfectly viable, but harder and more costly for a financial institution to assess. Getting a bank loan can therefore depend not only on whether a business is viable, but on whether a lender can see enough of that viability to lend.
This information gap can become self-reinforcing. Limited information restricts access to finance, while limited finance makes it harder for firms to grow, invest and formalise.
When a Website Becomes a Credit Signal
Digitalisation can change how smaller enterprises are seen by lenders. A registered website can provide one observable marker of a firm's digital presence, while digital transactions and other forms of online activity can generate information about a business that is more visible and current than conventional financial information.
Evidence from the World Bank Enterprise Survey, covering 6,381 firms with 10–99 employees, points in this direction. The study uses the presence of a registered website as a measure of ICT adoption. Fifty-three percent of the firms had such a website, while 10 percent had outstanding credit and 6 percent had applied for a loan in the preceding financial year.
After accounting for the possibility that firms with better access to finance may also be more likely to adopt technology, ICT adoption is associated with an 11.2 percentage-point increase in the probability of having outstanding credit, a 17.3 percentage-point increase in the probability of applying for a loan, and a 19.8 percentage-point increase in the probability that a loan application is approved.
These are sizable effects in a credit market where formal borrowing remains limited. They suggest that digitalisation can strengthen a firm's position at the gateway to formal credit. The evidence does not, however, establish that digital adoption increases the amount of credit a firm ultimately receives.
Making Small Firms Legible to Finance
A website may be only the visible sign of a deeper change within the firm. Digital adoption can accompany greater formalisation, more systematic record-keeping and more observable commercial activity, giving lenders a clearer picture of a small business and reducing some of the information asymmetry surrounding it.
The evidence supports this mechanism. Among SMEs, ICT adoption is associated with a 25.8 percentage-point greater likelihood of having externally audited accounts and a 9.5 percentage-point greater likelihood of engaging in innovation. Digital adoption may therefore reflect both greater financial transparency and changes in the underlying capabilities of the firm.
The study's separate analysis of microfirms shows why this matters particularly for the smallest businesses. In this sample, 97 percent of firms have fewer than five employees. Microfirms using ICT are 42.9 percentage points more likely to maintain a formal profit-and-loss statement, 25.5 percentage points more likely to maintain a separate account for the establishment, and 15.3 percentage points more likely to have a savings account. ICT adoption is also associated with a 36.1 percentage-point increase in the probability of having outstanding credit and a 23.2 percentage-point increase in the probability of applying for a loan.
For businesses this small, such practices can make an important difference to how they are assessed. Creating business records, separating business and personal finances, and establishing relationships with the financial system give lenders information with which to evaluate enterprises that might otherwise remain difficult to assess.
Information is not the only channel through which digitalisation may matter. The study also examines financial awareness, innovation and productivity as mechanisms linking ICT adoption with access to credit. But the information channel has particular relevance for credit policy because it addresses a structural disadvantage faced by smaller firms: lenders often know less about them.
Bringing Digitalisation Into the Credit System
The evidence points to a useful complementarity between India's digitalisation agenda and its SME finance agenda. Digitalisation can form part of the infrastructure through which smaller firms become visible to formal finance.
That calls for a broader approach to digital support for small businesses. Policy should encourage forms of digital adoption that generate useful and credible business information, including digital transactions, accounting and invoicing systems, formal business accounts and online commercial activity. A website can be an entry point, but the objective should extend beyond establishing an online presence to helping firms develop a digital information trail that reflects their underlying business activity.
The next step is making such information usable for lending. Financial institutions need appropriate ways to incorporate relevant digital signals into credit assessment, particularly for firms with limited conventional credit histories. India's expanding digital financial architecture creates opportunities to do this.
But digital visibility should not become another compliance requirement. Small firms should not have to generate ever more data simply to establish that they are creditworthy. Policy should enable the responsible use of relevant business information while protecting firms as their commercial data increasingly become part of financial decision-making.
Getting Seen Is Only the First Step
Digitalisation can help a small business become visible to formal finance, but visibility is not the same as adequate finance. It cannot by itself ensure sufficient credit, affordable terms or finance suited to a firm's investment needs. Those remain separate policy challenges, and digitalisation must complement measures addressing the other constraints on SME finance.
India's next digital divide could therefore run between firms that are visible to finance and those that remain difficult to see. The policy opportunity is not simply to digitise more small businesses, but to ensure that digitalisation helps viable firms build the information record through which formal finance can recognise them.