Access to loan made easy: Public sector banks to develop internal credit rating systems for MSMEs by Oct

External rating can be very expensive for MSMEs.

Public Sector Banks (PSBs) in India are expected to establish internal credit rating systems for Micro, Small, and Medium Enterprises (MSMEs) by  October, according to a senior government official. The move aims to ease the financial burden on MSMEs by reducing their reliance on costly external credit ratings.

According to the official, significant progress has been made in this direction. “The mechanism will be in place within the next three months, as about 50 per cent of the work has been completed,” the official told Moneycontrol.

Fillip for MSMEs 

The  initiative is part of a broader effort by the government to support the growth of MSMEs, which are considered the backbone of the Indian economy. The official explained that the PSBs’ internal credit rating systems would make it handy for micro businesses to access funds, leading to their expansion and further fueling economic growth.

At present, banks require credit ratings from MSMEs seeking loans beyond a certain limit, which is, typically, set by the financial institutions’ boards ranging from Rs 30 to 50 crore. At times, banks demand external credit ratings for loans below Rs 30 crore, which prove to be a costly affair for MSMEs.

Easier access to credit

The government, which has been championing the cause of MSMEs, is looking at alleviating the financial strain on small businesses.

Though PSBs use external credit ratings, loans are not approved solely on their basis. “It’s not a one-size-fits-all approach. Banks do conduct their own internal assessments. Now, the government is  emphasising that banks should develop their own models to approve loans to MSMEs through a new, independent and in-house mechanism,” the official added.

Earlier, on July 23, while tabling Union Budget 2024-25 in Lok Sabha, Finance Minister Nirmala Sitharaman proposed that PSBs would take a lead in developing a new credit assessment model, based on digital footprints of MSMEs in the economy. “This is expected to be a significant improvement over the traditional assessment of credit eligibility based only on asset or turnover criteria. That will also cover MSMEs without a formal accounting system,” the minister had said.