Onboarding MSMEs at Scale: KYB in Tier 2 and Tier 3 Markets
June 24, 2025
5 minutes read
- Inconsistent documentation across government databases, limited digital literacy, poor internet connectivity, and language barriers in digital interfaces create the most significant hurdles when onboarding MSMEs.
- RBI allows risk-based due diligence and simplified KYC for smaller exposures. Ensure documentation standards meet regulatory minimums while optimizing for operational efficiency and customer experience.
I was grabbing coffee with a friend who manages KYB compliance at a private bank last week. He looked exhausted.
‘Dude, we rejected this guy running a MSME from Kanpur yesterday,” he shared. “Eight years in business, makes decent money, and customers love him. But his electricity bill says “Shri Ramesh Kumar Textiles” and his trade license says “R.K. Textiles Pvt Ltd” and our system just… can’t handle it.’
I laughed. ‘So reject him?’
‘That’s the thing – we did! Then my junior called me today. Turns out the guy’s been banking with our competitor for three years now. They figured out a way to verify him.’
My friend stared at his coffee. We can’t even tap a big chunk of this massive MSME market because we’re too rigid. These small-town guys don’t have corporate secretaries fixing their paperwork. They just… run businesses.’
That conversation stuck with me. Financial institutions want MSME business, especially in Tier 2 and Tier 3 cities. The growth is there, and the opportunity is massive. But their KYB processes? Built for a completely different world.
So, I rolled up my sleeves and sat across with my team to find solutions that can help financial institutions expand in credit-hungry segments of India’s smaller towns.
But first, here’s a high-level overview of current problems.
Why Standard KYB Fails in Tier 2/3 Markets
Existing KYB processes weren’t built for Indian MSMEs. They handle corporates with compliance teams just fine but completely break down when faced with the businesses that actually power India’s economy.
Now, to point out the culprits, I found three main reasons.
1. Documentation Gaps
Your system expects perfect document consistency across all business registrations.
What you get instead: electricity bills with one business name format, trade licenses with slight variations, and GST certificates showing different address styles.
Your system screams fraud. The business owner has been running legitimate operations for years, but your rigid verification can’t handle the reality that small businesses are just… messy.
2. Infrastructure Realities
Your KYB process expects reliable internet and rich digital footprints. What you get instead: intermittent connectivity, businesses whose entire online presence is a WhatsApp account, and verification systems that time out mid-process.
The local branch manager knows these businesses personally, but your centralized system has no way to capture that intelligence.
3. “Risky Nature” Myth
And now, if you are thinking the market is left untapped because of the “risky” nature of the segment, numbers are going to sting you.
MSMEs show 1.79% delinquency rates – the lowest in five years. That means out of every 100 MSME loans, fewer than two are overdue or ended up in default. The segment isn’t risky; your verification process just can’t tell good businesses from bad ones efficiently.
Solution to Onboard MSMEs at Scale: API-Driven KYB
The infrastructure to solve MSME onboarding already exists. You just need to connect the dots differently.
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OCR APIs for vernacular documents
OCR APIs now handle Hindi, Tamil, and regional language documents with 90%+ accuracy, eliminating the paperwork bottleneck that kills most applications. One API call extracts all relevant data from a trade license or utility bill – no more manual data entry errors or week-long document processing delays.
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Udyam verification APIs validate business registration instantly.
Instead of manually checking business registrations, Udyam APIs instantly validate MSME status and pull complete business details. A single API call using PAN or phone number returns business classification, registration date, and activity details. Cross-reference owner information automatically to ensure authenticity – what used to require physical certificate verification now happens in seconds.
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GST integration APIs reveal business footprint
PAN-to-GST APIs instantly pull all GST registrations linked to a business, revealing multi-location operations and business scale. HSN code extraction shows actual product categories and business activities, validating stated business purpose against registration records. This automatic cross-verification catches discrepancies that manual processes miss.
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Specialized verification for sector-specific businesses
Food businesses get instant FSSAI license validation, while export-oriented MSMEs can be verified through SNEC (Statutory and Regulatory Entity Code) APIs. These sector-specific verifications ensure compliance requirements are met without additional documentation rounds, speeding up approval for specialized business types.
For banks ready to move beyond manual processes, Signzy integrates all these APIs into unified workflows, arranging the entire verification process from document upload to final risk assessment.
Instead of managing multiple vendor relationships and API integrations, you get a single platform that handles MSME onboarding end-to-end – reducing implementation time and operational complexity while delivering the speed your MSME customers demand.
To know more about how exactly Signzy can help you onboard MSMEs efficiently, continue reading here.
FAQs
What's the difference between KYC and KYB for MSMEs?
KYC verifies individual identity, while KYB verifies business legitimacy. For MSMEs, KYB includes business registration, financial health, operational validation, and compliance checks specific to commercial entities.
What documents do Tier 2/3 MSMEs typically have for verification?
Most have Aadhaar, basic bank statements, electricity bills, and GST registration. Many lack formal financial statements, audited books, or comprehensive business documentation that metros expect.
Can KYB be done without physical branch visits?
Yes, with mobile verification apps, video KYC, and digital document submission. However, hybrid models combining digital processes with occasional field verification work best for trust-building.
Which APIs are most critical for MSM
GST verification, bank statement analysis, identity verification, and mobile number validation form the core. OCR for vernacular documents and UPI pattern analysis add significant value.
