Nine years after its launch, most people know the basic case for the Goods and Services Tax (GST). It replaced a cascade of central and state levies with a unified tax system, turning India’s 29 states into a single market. Since 2017, a manufacturer in Coimbatore has been able to sell to a retailer in Guwahati without a fresh layer of tax at every state border. While these gains are often cited, less discussed is a second-order benefit beyond taxation and compliance: GST’s role in creating financial information that helps small businesses access credit.

Information Gap
MSMEs account for over 30% of India’s GDP, and more than 90 million are registered on the government’s Udyam portal. The problem GST is helping to solve is an old one: information asymmetry in credit markets.

Joseph Stiglitz and Andrew Weiss showed in their pathbreaking 1981 paper that a lender unable to distinguish a good borrower from a bad one does not simply raise interest rates to compensate for risk. Higher rates can drive the safest borrowers out of the pool, leaving riskier borrowers willing to pay more. Instead, lenders ration credit, cutting off deserving borrowers from finance altogether. India’s MSMEs have sat on the wrong side of that rationing for decades. While their businesses may have been viable, banks could not rely on a shopkeeper’s handwritten bahi-khata, the ledger that has run Indian small businesses for generations, to assess turnover or repayment capacity.

Hernando de Soto described a similar problem with land markets in developing countries. In The Mystery of Capital (2000), he argued that the poor held wealth in real assets, particularly land, but outside formal title systems. Those assets could neither be pledged as collateral nor readily verified by banks. He called this dead capital: wealth that was real but invisible to formal finance. Giving land a formal title makes it usable as capital. GST return data does something similar for MSME turnover. A firm’s GSTR-1 and GSTR-3B filings, reconciled against its e-invoicing trail, produce a verifiable sales record that a handwritten ledger cannot.

The infrastructure for this has gradually taken shape. In November 2022, the RBI designated the GST Network (GSTN) a Financial Information Provider under the Account Aggregator (AA) framework. An AA-registered lender can now fetch a borrower’s GST returns digitally, with consent and pre-verification through the tax system. SIDBI’s GST Sahay, built on this rail, turns that data into a credit application, enabling lenders to offer small, collateral-free working-capital loans to micro enterprises using GST invoices rather than audited financials. The result is a shift from balance-sheet lending to real-time, data-driven cash-flow lending.

Credit Quality
The scale of this shift shows up in the numbers. Outstanding MSME credit has grown from ₹10.4 trillion in December 2013, before GST’s rollout, to roughly ₹65.8 trillion today, a 16% compound annual growth rate. As a share of GDP, it has risen from close to 9% to roughly 19%, well ahead of nominal GDP growth.

According to SIDBI’s latest MSME Pulse report, 42% of new loan originations in the last financial year went to first-time formal borrowers. Individual-led business loans, meaning proprietors or business owners borrowing for business activity rather than enterprise borrowing, now account for 28% of outstanding commercial balances. A decade ago, this category had very limited access to formal credit.

A more revealing number is repayment performance. Bank MSME Gross NPAs, or loans on which interest or principal has not been serviced for 90 days or more, fell from 11% in March 2020 to 3.3% by September 2025, close to the 2.15% Gross NPA ratio for all loan types. Bureau-level delinquency, the share of loan value 90 to 720 days past due (DPD), peaked at 4.4% for MSMEs in September 2021 and has since fallen to around 1.8%, roughly in line with system-wide figures. A segment long treated as structurally riskier no longer looks that way in aggregate.

But the aggregate hides an uncomfortable detail. The MSME Pulse report shows that delinquencies in the ₹20 million–200 million and ₹200 million–1 billion bands have fallen to 1.5% and 1.1%, respectively, in 2025. Delinquencies in the smallest ticket size, loans up to ₹20 million, however, have plateaued at around 2.6% since mid-2024.

This is happening even as credit to the individual-led, first-time-borrower segment continues to grow fastest. More credit, in other words, is reaching borrowers whose credit quality has stopped improving. Public sector banks dominate the below-₹20 million segment, NBFCs lead the ₹20 million–200 million band, and private sector banks lead the ₹200 million–1 billion band. That divide matters when examining the reasons for the plateau.

Three structural reasons could explain this. First, the input tax credit (ITC) chain disciplines suppliers into filing GST returns accurately, since a formal buyer cannot claim credit against an invoice that does not reconcile. But this works only when the buyer is inside the formal GST net. The smallest firms sell disproportionately B2C, to consumers, rather than B2B, to registered businesses, leaving them outside this chain.

Second, compliance costs fall unevenly on micro units. The time and working capital spent reconciling filings and waiting for ITC refunds are fixed costs that weigh far more heavily on a business turning over ₹5 million than one turning over ₹500 million.

Third, priority-sector and Mudra-type lending targets, which bind hardest on the public sector banks dominating this segment, push them towards volume at the smallest ticket sizes regardless of what GST data says about creditworthiness. The mandates focus largely on accounts opened and rupees disbursed, rather than screening quality.

Closing the Gap
Each friction has a direct policy response. B2C firms will never get the benefit of ITC discipline, but many already leave a digital trail through UPI and card settlements. Extending the consent-based data architecture carrying GST filings to digital payment histories would give lenders a second verifiable signal for firms tax data cannot reach. It also creates a market opportunity for lenders able to underwrite B2C-facing micro firms using UPI and payment data.

Priority-sector and Mudra-type targets could also give explicit weight to GST-data-verified lending, incentivising banks to screen small loans well rather than simply originate them to meet targets.

Two further GST reforms could encourage unregistered micro units to enter the tax system, borrow, scale and repay. Return filing could be simplified further, perhaps through a single, pre-filled return. A fixed-term prosecution holiday for newly registered micro units, shielding them from scrutiny over reporting delays or errors, could remove one of the strongest reasons to remain outside the GST register.

None of this diminishes what GST has already done for small-business finance. A ledger that no bank could read has become a digital credit history for millions of firms. What remains is to make it easier for the segment still outside the system to step inside it.

*Views are personal.