New Digital Credit Assessment Model for MSMEs

GS3 – Economy

Context

Public Sector Banks (PSBs) in India have implemented a new digital model for credit assessment aimed at speeding up and standardising loan approvals for Micro, Small, and Medium Enterprises (MSMEs).

What are Public Sector Banks (PSBs)?
  • Government holds a majority stake (more than 50%) in PSBs.
  • Operate under the Ministry of Finance and are pivotal to financial inclusion, welfare implementation, and priority sector lending.
Salient Features of the Digital Credit Model
  • Automated, Objective Lending:
    • Manual underwriting is replaced with data-driven decisions based on digital records.
    • Loans can be sanctioned within 24 hours using system-generated credit logic and scorecards.
    • Business Rule Engines (BREs) are customised as per each bank’s risk appetite.
  • Data-Driven Evaluation Mechanism:
    • Real-time verification through PAN (via NSDL), GST data (via APIs), and bank statement analysis using the Account Aggregator system.
    • Additional checks include ITR validation, credit bureau scores, mobile/email OTP authentication, and fraud risk assessments.
  • Completely Paperless Process:
    • End-to-end digital journey covering application, document submission, appraisal, and approval.
    • Enables MSMEs in rural or remote regions to access credit without physical bank visits.
Significance of MSMEs in the Indian Economy
  • Economic Contribution: Account for about 30% of India’s GDP, 45% of exports, and 38.4% of manufacturing output.
  • Mass Employment: Employ over 11 crore individuals, making them the second-largest source of jobs after agriculture.
  • Vast Reach: Nearly 6.4 crore MSMEs operate across India, with over 1.5 crore formally registered on the Udyam portal.
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