Fixing India's Credit Blind Spot: Link Invoices to Payments

Credit markets do not fail for lack of capital alone; they fail when lenders cannot reliably assess creditworthiness. At the heart of India's persistent MSME liquidity stress lies a structural asymmetry of information, particularly about sales realisation and payment behaviour that distorts risk pricing, misallocates capital, and weakens both the credit and payment ecosystem.

For any creditor, such as bank, NBFC, fintech lender, or trade creditor, creditworthiness is the decisive input. In practice, it is best measured not by static balance sheets or collateral, but by verified evidence of cash flows: sales generated and payments realised, on time and in full. Where such information is unavailable or fragmented, lenders respond rationally by raising risk premia, demanding collateral, rationing credit, or avoiding smaller firms altogether. The result is a credit market that is inefficient and biased toward larger, better-documented firms.

This inefficiency stems from dual asymmetries of information that have plagued credit markets for generations. First, lenders cannot reliably assess a borrower's ability to repay—lacking visibility into actual cash flows, payment cycles, and working capital velocity. Second, and equally critical, they cannot gauge willingness to pay—the borrower's track record of honouring obligations when cash is available. These twin information gaps create an age-old weakness that severely impacts the efficiency and potential of the entire credit ecosystem, constraining credit flow from banks, NBFCs, trade creditors, and fintech to MSMEs and small-mid corporates. Without credible signals on both dimensions, even creditworthy firms face higher costs and restricted access, while the system misallocates capital and suppresses economic activity.

India's MSME credit policy framework is bank-centric because policies are shaped by the data that are available. While the RBI compiles structured bank-credit data, trade credit, or TC, which meets a large share of MSMEs' working-capital needs, remains fragmented and uncompiled. As a result, policy attention, academic analysis, and regulatory interventions have gravitated toward what is visible and measurable in banking statistics, while overlooking the financial mechanism that sustains millions of day-to-day business operations.

Invisible Backbone
For MSMEs and traders, TC dominates working capital flows, often close to 80%. Importantly, across small-, mid-, and large-cap corporates, including Nifty-50 manufacturing firms, trade payables consistently exceed bank working capital by a wide margin. RBI corporate data spanning nearly four decades overturn the notion that TC is merely an MSME phenomenon: across 2.38 million company-years (1986–2023), TC has persistently exceeded bank working capital as a share of sales [Table].

 Corporate Data Points (1985–2023) – Average Sales, Number of Companies, and Working Capital Ratios

• Corporate sector (RBI data): Sundry creditors ~16–17% of sales vs bank WC ~8–14%
• Nifty-50 manufacturing firms: TC ~19% of sales vs bank WC ~3%

Yet this largest component of working capital remains largely absent from credit policy because TC data are fragmented, bilateral, and opaque, leaving payment behaviour unmeasured and, therefore, outside the scope of effective policy design, risk pricing, and regulation. Consequently, decades of well-intentioned initiatives—credit guarantees, specialised MSME financing institutions, TReDS, supply-chain finance, and statutory payment-delay rules—have delivered only marginal relief.

Category Error
Persistent underperformance points to a fundamental category error. Policymakers have treated MSME stress as a resource-supply problem — insufficient bank credit, whereas the binding constraint is a market-structure and payment-system problem rooted in TC. In practice, incremental bank credit often ends up financing higher TC to large firms and inventory holding, offering only marginal relief to MSME liquidity. Large corporates financials show that many rely less on bank working capital and more on supplier credit, effectively transforming trade payables into working capital, and, at times, treasury resources (Nifty-50 financials in Table).

In the absence of transparent B2B payment ratings, MSMEs compete to supply "safe" buyers, accept longer payment cycles, and absorb financing costs.

In B2B markets, credit initiates trade, but payment sustains it. Credit flow is oxygen; payment flow is the circulation. When circulation fails, economic activity is disrupted—even if credit disbursements appear healthy. Bank-centric metrics capture loan growth but miss net working-capital outcomes, payment delays, and the direction of trade-credit flows. Policy concludes that "credit is flowing" while small firms endure chronic cash-flow stress.

New Possibilities
Pairing invoices with their corresponding payments is not merely a technological upgrade; it creates, for the first time, a universal and reliable credit-evaluation tool grounded in verified economic behaviour. Enabled by the digitalisation of invoices through GSTN and real-time payment data across banking and payment rails, this linkage converts payment discipline into an objective, tamper-resistant credit signal.

Unlike balance sheets, ratings, or model-based proxies, which are backward-looking and vulnerable to manipulation, invoice–payment pairing reflects live cash-flow truth. It is institution-agnostic and usable across banks, NBFCs, fintech lenders, and trade creditors alike. By transforming payment behaviour into real-time credit intelligence, it can unlock latent working-capital capacity and accelerate business activity across the economy. This is a once-in-a-generation opportunity, enabled by India’s digital public infrastructure, to reduce friction by addressing ability-to-pay and willingness-to-pay asymmetries in credit appraisal and let the system operate closer to its true economic potential.

The failure to recognise TC's operational role has blunted the impact of financing, regulatory, and payment-discipline measures. Without visibility into payment behaviour, enforcement remains retrospective, complaints-based, and weak. Pairing invoice and payment data through GSTN would introduce reputational consequences for chronic delays and rewards for timely payment.

This is uniquely feasible in India because of the coexistence of GSTN and a real-time digital payments spine. It would enable dynamic B2B credit ratings, early warning signals for lenders, and verifiable receivables as collateral—transforming TC from an informal obligation into a transparent and vibrant credit market.

Operational Design
For invoice–payment pairing to operate as public infrastructure, the linkage must be embedded at the point of invoice generation and payment settlement through integration of existing digital rails. Accounting systems can carry GSTN-linked invoice identifiers, payment systems can reference them at settlement, and GSTN can act as a neutral pairing layer to certify whether invoices are paid, delayed or unpaid—without intermediating payments or exposing commercial data. Governed through consent-based access, this would convert fragmented bilateral information into verified, economy-wide payment-performance signals, closing a long-standing blind spot in India's credit system. India's MSME credit challenge has persisted not because of insufficient effort, but because of misplaced focus and lack of TC and payment data. By concentrating on bank credit and ignoring TC, the operational core of working capital, policy has targeted the visible 20% while neglecting the invisible 80%.

Digitally linking invoices with payments would light a long-ignored blind spot by turning payment behaviour into real-time credit signals, shifting India's credit system from backward-looking, manipulation-prone proxies to transparent, market-based cash-flow truth at scale. TC and payment data as public infrastructure can drive real-time macro insight, unified lending interface, higher GDP and tax revenues, and accelerate the objectives of Viksit Bharat 2047.