Finance ministry likely to launch digital credit assessment model for MSMEs in December

The initiative, announced in the Budget, promises to help smaller MSMEs, which are often ignored due to lack of formal documents, to get loans easily.

The finance ministry will in December launch a credit assessment model for Micro, Small, and Medium Enterprises (MSMEs) to simplify loan access by leveraging digital footprints, a government official has said.

The initiative, announced in the Budget 2024, promises to replace traditional credit assessment mechanisms with a data-driven approach and help smaller MSMEs, which are often ignored due to lack of formal documents, to get loans easily.

“The framework for the new model is complete and is being piloted. The credit assessment model for MSMEs will launch next month,” the official told Moneycontrol on condition of anonymity.

The guidelines were ready and and finance minister Nirmala Sitharaman would likely unveil the initiative. The model captures MSMEs’ digital footprints to assess their creditworthiness, moving away from the requirement of external ratings, which would help save costs for MSMEs, the official said.

Digital footprints refer to data trails created through online activities. For MSMEs, this includes business-related transactions such as employee salary payments, utility bills, bank transactions, and contributions towards provident fund (PF) and the National Pension Scheme (NPS).

Banks will analyse these data points to determine the financial health of businesses, particularly those lacking formal documentation such as balance sheets.

According to Reserve Bank of India (RBI) data, the number of accounts and amount outstanding to MSME sector by scheduled commercial banks in 2022-23 was 213.32 lakh and Rs 22.6 lakh crore respectively.

The expert committee on MSMEs, constituted by the Reserve Bank in 2019, estimates the credit gap in MSME sector to be in the range of Rs 20 to 25 lakh crore.

Bridging the gap

The new model aims to address challenges faced by smaller MSMEs, which are often overlooked due to inadequate formal documentation.

"Even if an MSME employs just 10 people, paying salaries and PF generates valuable data. This can be used to assess its creditworthiness. Current guidelines don't permit this, but they will be updated to reflect these changes," another official said.

Traditionally, banks have treated MSMEs as corporates, using assessment guidelines that favour larger enterprises. The digital credit assessment model seeks to bridge this gap by focusing on smaller businesses.

The initiative is expected to reduce the burden on MSMEs of obtaining external ratings, which is mandatory for loans exceeding Rs 30-50 crore and sometimes even for smaller amounts.

"Banks will develop internal credit rating models, reducing the dependence on external agencies. This will make credit cheaper and more accessible for MSMEs," the official said.

Integrated with the Credit Guarantee Scheme

The Rs 100-crore Credit Guarantee Scheme for MSMEs, announced in the Budget, will be operationalised through the new model.

The scheme allows MSMEs to secure loans without third-party guarantees or collateral. It also extends beyond working capital, enabling MSMEs to access term loans for plant and machinery.

"The principles of giving credit to MSMEs will remain the same; only the assessment mechanism changes. The umbrella of safeguards for MSMEs remains intact," the official said.