Finance Ministry Pushes for New MSME Credit Assessment Model, Pilot Programmes Underway

New Delhi, Sep 16 (KNN) In alignment with its Union Budget 2023-24 announcement, the Ministry of Finance has instructed Public Sector Banks (PSBs) to initiate pilot programmes for a revamped credit assessment model tailored for micro, small, and medium enterprises (MSMEs).

Official sources indicate that the Indian Banks' Association (IBA), responsible for developing this new framework, is set to unveil it before the end of the current fiscal year. "Work is happening in full swing. You will see the rollout in the coming days," sources confirmed.

During her Budget speech earlier this year, Finance and Corporate Affairs Minister Nirmala Sitharaman emphasised the need for PSBs to build in-house capabilities to assess MSME creditworthiness, moving away from reliance on external evaluations.

Federation of Indian Micro and Small and medium Enterprises had forcefully raised the issue before the Finance Minister during pre-budget consultations. FISME had insisted that Blank Laon Ratings (BLR) that Banks were insisting from MSMEs was becoming a financial burden and a source of harassment in the hands of Credit rating Agencies.  

“Rating agencies employed rating models of large corporates on MSMEs resulting in their poor ratings and consequently raised cost of finance for MSMEs”, says Neeraj Kedia, Chairman Banking Committee of FISME.        

The new model is to do away with third part ratings  As envisioned, it would leverage digital footprints of MSMEs to gauge credit eligibility, particularly targeting enterprises that operate without formal accounting systems.

This new model is expected to be a departure from the traditional approach, which largely bases credit eligibility on asset ownership or turnover.

Instead, it offers a more holistic view of an MSME’s financial health through digital transactions and records. Industry experts believe this shift will resolve the long-standing issue of mismatched financing, which has previously constrained MSME growth.

Historically, banks have relied on external assessments and Credit Monitoring Arrangements (CMA) for MSME credit evaluations, a process often criticised for its shortcomings.

These external reports frequently led to either over-financing or under-financing of businesses, undermining their sustainability and growth potential. The new model aims to address these gaps.

MSMEs are the backbone of India's economy, contributing over 30 per cent to the GDP and nearly 50 per cent of exports.

With more than 63 million enterprises across urban and rural areas, they play a critical role in fostering balanced regional development, reducing income disparities, and generating employment.

In fact, MSMEs employ over 110 million people, second only to agriculture, making them vital for poverty alleviation and rural income growth.

Despite their significant contribution, MSMEs face challenges such as limited access to credit and infrastructure issues. The government's push to enhance credit access, alongside initiatives like ‘Make in India’ and ‘Atmanirbhar Bharat’, underscores the strategic importance of MSMEs in reducing import dependence and driving innovation.

Economy experts stress that supporting MSMEs through better credit models is essential to achieving India’s long-term vision of becoming a developed nation by 2047.

(KNN Bureau)