Finance Minister Nirmala Sitharaman’s Budget 2024 introduced a Digital Credit Assessment Model of MSMEs. According to the announcement, public sector banks (PSBs) would develop a new credit assessment model for Micro Small and Medium Enterprises, to simplify loan access by leveraging digital footprints.

Digital footprints refer to the data trail created through online activities such as business-related transactions, GST filings, salary payments, utility bills, and contributions towards the Provident Fund (PF) and the National Pension Scheme (NPS). This data will be analysed by the bank to assess the financial health of the businesses. This will be particularly important for businesses that have no formal documentation such as balance sheets.

Currently, the credit assessment model relies heavily on credit scores, requiring MSMEs seeking loans above a certain threshold- typically between Rs 30 crore and Rs 50 crore- to obtain credit ratings from external sources, making the process cumbersome for small businesses. Apart from that loan applications require income-tax returns spanning one to three years, along with six months of bank statements and 12 months of sales details for non-GST registered businesses.

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

According to Reserve Bank of India (RBI) data, approximately Rs 22.6 lakh crore amounts belonging to 213.32 lakh accounts in the MSME sector are outstanding to the scheduled commercial banks.

However, recent RBI data shows that until June 2, 2024 credit growth to MSMEs had a year-on-year increase of 9.9% compared to the overall loan growth of 15.4%.

The new model aims to bridge the credit gap that small and medium businesses face due to inadequate formal documentation. Even if a company is paying salaries to 10 employees there will be valuable data generated from their PF documents which can help to assess creditworthiness.

The Reserve Bank of India (RBI) is also working on the Unified Lending Interface (ULI). The initiative was announced by the Hon’ble RBI Governor, Shri Shaktikanta Das, announced it on August 26, 2024, at the 90^th Global Conference. Developed by the Reserve Bank Innovation Hub and co-conceptualised by the RBI, ULI is a technology platform that facilitates easy access to authenticated data from various sources through standardized APIs to which all lenders can connect seamlessly through a plug-and-play model.

The platform will store financial, non-financial and alternative data, from digitized land records, satellite data and property search services, and milk pouring data from milk federations through a single interface.

As of now, both the initiatives are in development and ULI is in its pilot phase.  The full-scale launch of these digital credit assessment models is anticipated soon, probably by the end of the financial year 2024-25.