“Microfinance institutions”, globally have specified that more than grants or subsidies, tax rebates, Micro Small and Medium Enterprises need access to credit. SME sector stands for Small and Medium Enterprises which comprises of small businessman, medium and large-scale industries. Moreover, SME is the apex body for the formulation and administration of rules, regulations and laws relating to small and medium enterprises. “The statistics provided by the annual reports of Ministry of Small and Medium Enterprises (MSME) shows a rise in the plan amount spent on the khadi sector from Rs. 194.27 crores to Rs. 1454 crores, and non-plan amounts from Rs. 43.74 crores to Rs. 229.1 crores, in the period from 1994-1995 to 2014-015”. Many innovative institutional mechanisms have been developed across the world to enhance credit to SME sector even in the absence of formal mortgage. But the current system of issuing loans to the SME Sector through microfinancing schemes adopted by the central bank is very obsolete and needs to be digitalized. The increase in popularity of Microfinance has led to an asymmetric and exponential increase in demand for the same by the SME Sector. Moreover, the banks are deprived of a consistent and common platform for issuing loans and keeping track of the loans issued in the past. These factors have led to an enormous decline in the efficiency, productivity and transparency of micro financial institutions thereby increasing the default rate. This paper proposes a Smart Contract Technology which will be integrated with the present system and will improve the efficiency and transparency of Micro financial Institutions thereby decreasing the default rate. The platform is a decentralised platform and is based on Blockchain Technology. The said technology will issue a unique Smart- Contract on the name of every entrepreneur/organisation who approaches the bank for Microfinance. A Smart-Contract is a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract. Smart contracts allow the performance of credible transactions without third parties. These transactions are trackable and irreversible. The ‘transaction’ will be a request for loan/credit by SME sector from the bank or any authorised financial institution. The issued Smart Contract will act as an identity against the loan issued and will be a unique, irreversible identity which can be invoked anytime in the future to issue a loan or update/request for any information related to the loans. The entire information regarding the loan will be regularly updated in the smart contract by the bank and the previously updated information is irreversible and cannot be edited thereby adding a new layer of security to the transactions. The banks will request for access to smart contract from the Central Bank whenever they want to check past records of individual/corporation and hence can transparently issue new loans. The information stored in Smart-Contract is secured through distributed Hyperledger technology on highly secured server. The Smart Contract will be like a report card for every Entrepreneur/ SME Corporation depicting the loans issued, amount repaid, amount outstanding, default time etc. This system will bring consistency and uniformity across the whole banking system since the unique Smart Contract will be issued and regulated by the Central Banks only. Thus, Implementation of Smart-Contracts in the SME Sector will not only increase transparency of banks but also help in reducing default rates and strengthen the role of Central Banks as a regulatory body.
Volume 11 | 06-Special Issue
Pages: 1730-1737