EP1022: The Next Big Reform for MSMEs Is Digital Trust

So think about the small businesses around you. You know, the ones actively trying to scale up, maybe bidding on bigger contracts or trying to add like a second factory or a new product line. Right. The business is really trying to make that next leap.

Exactly. If I asked you what single obstacle was holding them back the most, you would almost certainly point to funding. Oh, absolutely. Like a lack of working capital or, you know, the inability to get a loan.

But what if the core problem throttling these businesses isn't a lack of money at all? Which is such a wild concept. It is. What if the actual disease crippling their growth is simply, well, a lack of a mechanism to prove they can be trusted?

I mean, it forces you to completely reevaluate everything we assume about commercial growth. Right. Because we are practically hardwired to view every small or medium business struggle purely through the lens of a credit gap. Yeah, totally.

Like policymakers see a business failing to execute a big contract, and they immediately assume, oh, banks just need to open the lending taps wider. Which brings us to the mission for today's deep dive. We are looking at a stack of sources anchored by this incredibly revealing interview from the March 2026 IBSI FinTech Journal. Yeah, that was a fascinating read.

It really was. It features Aditya Tolshan, who is the CEO and co-founder of Axitrust. And there's this visual accompanying the piece that we both found really striking. Oh, the handshake one.

Yeah, it's these two glowing digital hands coming together in a handshake over a tablet. And it perfectly symbolizes the massive transition we are dissecting today. Aaron Ross Powell Right, which is the shift from using physical frozen cash as a guarantee of performance to utilizing pure digital trust. Aaron Powell Exactly.

And um we are going to dismantle that old assumption about the credit gap entirely because the argument Tolshan lays out is that treating the struggles of India's MSME sector. Trevor Burrus That's micro, small, and medium enterprises for the listener. Trevor Burrus, Jr. Right.

Treating their struggles as a liquidity problem is just a fundamental misdiagnosis. And you know, if you misdiagnose the root cause, the medicine you prescribe won't just fail. Trevor Burrus, Jr. It might actually make the patient sicker.

So let's ground this in reality for the listener. Because the symptom everyone sees is obvious, right? MSMEs stagnating, failing to win massive infrastructure or corporate projects. Yeah, they just hit a wall.

Right. Yeah. And to understand why throwing more loans at them doesn't fix the problem, consider how you might say rent an apartment. Okay.

I like this analogy. So imagine finding the perfect place, right? You sit down to sign the lease, and the landlord says the place is yours. But instead of a standard one-month security deposit, I require a 10-year deposit.

Wow. In cash delivered up front. I mean, you would technically still possess that money. Like it goes into an Espero account with your name on it.

Right. You haven't lost your wealth. But functionally, that capital is entirely dead to you. Exactly.

You are wealthy on paper, but you know, you can't afford to buy groceries for the fridge or a sofa for the living room because your liquid cash is just completely paralyzed. But you're immobilized. You are entirely immobilized by the demand for a guarantee. And this exact paralysis is happening to millions of highly capable businesses right now.

It is. The source data reviews that banks aren't universally refusing to back these businesses. The bottleneck is that the system mandates these businesses lock up astronomical amounts of collateral just to even bid on a project. Yeah.

And in the commercial world, these are called bank guarantees. Right. So if a government entity or a large corporation hires an MSME to say, build a bridge or deliver enterprise software, the buyer demands a financial safety net. Aaron Powell Makes sense.

They want to guarantee that if the MSME fail to deliver, the buyer gets compensated. Trevor Burrus Exactly. And traditionally, the MSME goes to a bank for this guarantee. The bank agrees to vouch for them, but uh only if the MSME hands over a massive cash margin or a fixed deposit to cover the risk.

Wow. So the bank basically takes the MSME's working capital, puts it in a vault, and turns the key. Aaron Powell And the scale of the money sitting in that vault is almost difficult to comprehend. Like the research in the journal highlights that nearly 15 lakh crore rupees of capital is currently paralyzed inside these bank guarantees.

15 lakh crore. I mean that is capital not being used to pour concrete, write code, hire engineers, or expand logistics networks. It's just dead weight. Absolute dead weight in the economy.

And this is the crux of Tolshan's argument. The MSME sector is gasping for air not because they don't generate enough revenue, but because the foundational architecture of commercial trust requires them to suffocate their own cash flow. Just to prove they're reliable. Exactly.

Which inherently punishes any business that relies on efficiency rather than like inherited wealth. Oh, completely. You could operate the tightest, most technologically advanced supply chain in your industry. You could have a flawless track record of delivery.

But if you are a balance sheet like business, meaning you reinvest your profits into growth rather than hoarding a mountain of idle cash. Trevor Burrus, Jr. Right. If you do that, you cannot compete for the biggest contracts.

The incumbents win simply because they have the sheer capital mass to lock up in a bank fault, while the innovative newcomer just gets boxed out. Aaron Powell Because the underlying assumption of a bank guarantee is that commercial risk can only be managed by taking capital out of circulation. Right. But mathematically, taking 15 lakh crore out of the productive economy actively suppresses national growth.

It chokes the very businesses we rely on to build infrastructure. So if immobilizing capital is actively harming these businesses, the alternative presented in the source material is the surety bond. Yes, the surety bond. Where the bank guarantee traps cash.

The insurance-backed surety bond is designed to replace that physical collateral. But this is where I need to um push back hard. Okay, let's hear it. Because if I am an investor or a project manager listening to this, warning sirens are going off in my head.

Well, we are talking about taking 15 lakh crore rupees of hard physical collateral out of the system and replacing it with insurance promises. Right. That sounds terrifyingly similar to the systemic risk behaviors that caused the 2008 global financial crisis. Ah, I see where you're going.

Aaron Powell Like taking away hard collateral and relying on distributed risk models feels like we are just awarding massive construction contracts on a handshake and a prayer. If the business goes bankrupt and there's no frozen cash to seize, aren't we injecting like a lethal amount of systemic risk into the economy? Aaron Powell It's the most vital question to ask. And honestly, it is exactly why the traditional mindset has been so resistant to change.

Because cash just feels safer. Trevor Burrus, Jr. Right. The instinct is always that a localized pile of cash feels safer.

But Tolshan's analysis completely inverts that assumption. Oh, really? Yeah. He argues that collateral heavy systems, the ones demanding cash up front, actually create severe risk concentration.

And that is far more dangerous to the broader economy. Aaron Powell Okay. Walk us through the mechanics of that. How does holding cash concentrate risk?

Aaron Powell Well, imagine an MSME that wins a major contract and locks up, say, 80% of its available working capital in a bank guarantee. Okay. They now have zero financial buffer. So six months into the project, maybe a separate client delays a payment by 30 days, or there is a sudden spike in the cost of raw steel.

Oh, I see. Aaron Powell Right, because their cash is frozen in the bank vault, they cannot absorb that shock. They can't pay their workers this week. So the project halts.

Wow. By aggressively squeezing the business for a collateral to make one specific contract, quote unquote, safe, the system itself actually causes the business to default. Trevor Burrus, Jr. You essentially starve the contractor to guarantee their performance, making it a self-fulfilling prophecy when they fail.

Aaron Powell Precisely. You haven't eliminated risk at all. You have just guaranteed that any minor supply chain hiccup becomes a fatal blow. Aaron Powell That is wild.

And insurance-backed surety bonds operate on a totally different mechanical principle. They separate the concept of trust from the hoarding of collateral. Rather than concentrating the risk onto the fragile balance sheet of a single MSME, they distribute it. It reminds me of the difference between how we used to generate power and how a modern smart grid works.

Oh, interesting. How so? Well, a bank guarantee is like forcing every single hospital, school, and factory to build and maintain its own giant coal power plant in the backyard, just in case the local power lines go down. It's wildly inefficient and expensive.

But a shirty bond is like connecting everyone to a national smart grid. You distribute the load dynamically, so no single building has to hoard excess capacity. Aaron Powell That is a perfect way to visualize it. And the smart grid in this scenario is driven by what the industry calls actuarial pricing.

Aaron Powell Let's translate actuarial pricing for the listener, because that sounds like heavy finance jargon. Aaron Powell Yeah, it does. Simply put, instead of blindly demanding 100% of the project's value and cash from every single contractor, insurers look at the mathematical probability of failure. Okay.

They analyze massive historical data sets covering tens of thousands of similar projects across different geographies and sectors. Aaron Powell So they're looking at the actual data. Aaron Powell Exactly. They calculate the exact likelihood of a specific type of contractor defaulting on a specific type of project.

They price the insurance premium based on that real world probability, and they pool those premiums. This means the risk is diversified across the entire economy rather than sitting like an anvil on the chest of one small business. And the immediate economic benefit of adopting that smart grid approach is massive. Like the analysis in the white paper estimates that if we simply swap the currently eligible bank guarantees for these insurance-backed surety bonds, yeah, it instantly unlocks 1.

30 lakh crore rupees in MSME liquidity. It's incredible. That is capital that immediately flows back into purchasing raw materials, upgrading technology, and hiring labor. And all without increasing the mathematical rate of default.

In fact, because the contractor actually has their money to manage supply chain shocks, the default rate should theoretically decrease. But if the math is this overwhelmingly positive, I mean, if we can distribute risk more safely and unlock over a lack crore in productive capital, the obvious question is why we are only dissecting this in 2026. Yeah. Why hasn't this been the standard for the last two decades?

Aaron Powell, because conceptual brilliance is useless without operational infrastructure. Trevor Burrus, Jr. Right. The interview frames this using the evolution of India's digital economy, which really clarifies the timeline.

India's digital growth was built on two very famous foundational pillars. Pillar one was digital identity. So systems that allowed a billion people to prove who they were digitally, which removed all that massive friction of paper onboarding. Right.

And pillar two was digital payments, which allowed value to move instantly at virtually zero cost. But the missing third pillar has always been digital trust. Specifically performance trust. Exactly.

And we have to clearly separate payment trust from performance trust. Aaron Powell How are they different? Well, when you buy a coffee, the trust requirement lasts for roughly two seconds. The merchant pings your bank, the bank confirms the funds, the transaction settles, and the risk drops to zero immediately.

That is what Pillar Two solved. Aaron Powell But commercial contracts operate in a completely different dimension of time. Exactly. If a government hires a company to lay 300 miles of fiber optic cable, the risk isn't over in two seconds.

It lasts for three years. You are dealing with future delivery risk. Which requires an entirely different set of rails. I mean, you cannot manage a three-year construction project using the same infrastructure you use to buy a cup of coffee.

Right. You need a system that governs and verifies performance over a long horizon. And until recently, three distinct roadblocks prevented that third pillar from being built. Aaron Powell And the first roadblock outlined was pure regulatory clarity.

Like you can't scale a financial instrument if the government hasn't legally defined it. No, you can't. And it wasn't until 2022 that regulators formally recognized insurance-backed surety products, which is what allowed them to move beyond tiny experimental pilot programs. Aaron Powell But clearing the legal hurdle immediately revealed the second roadblock, which was institutional mindset.

Oh, right. Imagine you are the procurement director for a massive state highway project. Okay. For your entire career, a guarantee meant a piece of paper you could physically carry to the State Bank of India and exchange for hard cash that same afternoon if the contractor messed up.

Right. Suddenly someone offers you a surety bond from an insurance company. Oh, you are going to reject it. Exactly.

Because your immediate fear is that if the contractor fails, you are going to spend the next four years fighting insurance adjusters in court just to get your money back. That is exactly the fear. Institutional buyers require formal policy alignment, guaranteeing that these new digital instruments carry the exact same certainty and speed of payout as the old cash-backed system. Makes sense.

But achieving that certainty brings us to the third and honestly the most difficult roadblock execution infrastructure. Trevor Burrus, Jr. And this is where Axitrust enters the narrative. Because an insurer can't just print out a PDF that says surety bond and expect the market to function.

Trevor Burrus No, they really can't. The entire ecosystem was completely siloed. Think about the players involved. You have banks who are structured to manage balance sheet risk.

Aaron Powell Meaning their primary concern is whether a short-term loan will be repaid without damaging their core assets. Aaron Ross Powell Right. Then you have insurers who are structured to manage long tail risk. Aaron Powell Meaning they specialize in calculating complex probabilities where claims might surface years down the line.

Aaron Ross Powell Exactly. And to issue a dynamic surety bond, you have to merge those two wildly different risk models in real time. Aaron Powell Well, so Axetrust is the connective tissue here. Yes.

They aren't trying to become a bank and they aren't trying to become an insurance company. They built the API layers and the digital rails that allow those isolated systems to communicate. Right. But I want to know what that actually looks like in practice.

Because when the sources mention continuous monitoring, how does a digital platform monitor a physical highway being built? It's a great question. Historically, an insurer issues a bond and essentially forgets about it until a disaster happens and a claim is filed. It's entirely reactive.

Very reactive. But Axitrust's infrastructure changes this to a proactive live feed. They integrate deeply into the digital ecosystem surrounding the project. Okay.

They monitor digital payment rails to see if the contractor is paying their vendors on time. They integrate with GST and tax invoice networks to verify that raw materials like cement and steel are actually being purchased and delivered to the site. Wait, really? So if a contractor wins a massive infrastructure bid, but suddenly stops paying their primary steel supplier for 60 days, the Axatrust system flags the anomaly long before the actual highway construction grinds to a halt.

Exactly. The insurer sees the risk escalating in real time. That is huge. It completely changes the underwriting math.

You don't need to hold a 100% cash margin if you have granular daily visibility into the financial health of the project. Right. This connective layer provides real-time data ingestion, continuous risk tracking, and standardized digital enforcement workflows. The insurer gets mathematical confidence, and the MSME gets their guarantee issued digitally without ever surrendering their working capital.

Aaron Powell If Axotrust has legitimately solved this execution hurdle, the downstream effect on the national economy goes way beyond just helping a few contractors manage their cash flow. Oh, without a doubt. I mean it fundamentally alters market dynamics. Aaron Powell Yeah.

The white paper actually describes this as the transition toward a quote unquote decollateralized economy. Aaron Powell Let's talk about what that actually means for the listener. Like if you are an investor looking at emerging markets or an entrepreneur trying to plot a 10-year growth strategy, how does a decollateralized economy change the way you spot winners and losers? Well, it forces a total recalibration of how scale is achieved.

In the old collateral heavy economy, the primary competitive advantage was the depth of your balance sheet. The incumbents won bids simply because they had the idle cash to lock up. Efficiency was secondary to wealth. Exactly.

But in a decollateralized economy, the basis of competition shifts entirely to execution capability. The moat is no longer how much cash you can hoard, the moat is how fast and how well you can build. Right. If an MSME can prove their credibility through a surety bond, they can suddenly bid on three projects simultaneously instead of just one.

Yes. And they use their working capital to buy better machinery, to hire top-tier talent, to shorten their delivery cycles. It creates a meritocracy where scale is driven by operational excellence. And when you multiply that operational acceleration across millions of businesses, the macroeconomic shift is profound.

Like, the analysis suggests that combining this immediate release of trapped liquidity with the long-term expansion of execution capacity can increase national GDP by an estimated 0.9%. Wow. A nearly 1% structural bump to the GDP of a major global economy purely by rewiring the architecture of commercial trust.

That's massive. It proves that the drag created by the old system was just astronomical. He noted the MSME problem was never just liquidity, it was how trust is priced and enforced in the system. And once you install the digital rails to verify trust transparently, the artificial liquidity crisis simply evaporates.

It really does. So let's retrace the conceptual path we just took. We started by challenging the deeply ingrained assumption that struggling businesses simply need more loans. We identified the invisible anchor dragging down the economy, the 15 lakh crore of vital working capital physically locked in bank vaults, just to satisfy the outdated mechanics of bank guarantees.

And then we examined the alternative mechanism, you know, how insurance-backed surety bonds replace the hoarding of cash with actuarial pricing. Distributing risk across a smart grid of data rather than concentrating it on a single fragile balance sheet. Exactly. And finally, we explored why this shift is only happening now, detailing how the missing third pillar of digital trust infrastructure, specifically the continuous monitoring and API integrations provided by connective layers like Axetrust, finally allows insurers and buyers to mathematically trust MSMEs without demanding their cash.

It really is the dawn of a decollateralized economy. An economy where what you can execute finally matters more than what you can lock in a vault. Well said. As we wrap up this deep dive, I want to leave you with a forward-looking question to consider.

Today we analyze this transition purely through the lens of massive commercial contracts and industrial supply chains. But think back to the analogy we used at the very beginning: the apartment with the 10-year cash security deposit. Right, the physical reality of trapped capital. Exactly.

Right now, this third pillar of digital trust is maturing by verifying the credibility of multimillion dollar construction firms. But as these digital rails become frictionless and ubiquitous, how long will it be before this exact same decollateralized trust model trickles down to our personal lives? Oh, that's a fascinating thought. Right.

Imagine a near future where your continuous real-time data profile entirely eliminates the need for you to scrape together a 20% cash down payment for a mortgage or hand over thousands of dollars in cash just to secure a residential lease. If the digital infrastructure can mathematically solve the performance trust gap for a corporation building a suspension bridge without requiring a vault full of cash, solving it for your next apartment rental might be arriving much faster than you think.