In line with its Budget announcement earlier this year, the Finance Ministry has asked Public Sector Banks (PSBs) to undertake pilot programmes of the new credit assessment model for MSMEs.
The Indian Banks Association (IBA), which has been tasked with the responsibility to come up with the new credit assessment model, official sources said, is expected to launch it before the end of the current fiscal.
“Work is happening in full swing. You will see the rollout in the coming days”, they said.
In-house assessment of MSMEs
Finance and Corporate Affairs Minister Nirmala Sitharaman had, in her Union Budget speech, said that public sector banks will build their in-house capability to assess MSMEs (micro, small, and medium enterprises) for credit instead of relying on external assessment. They will also take a lead in developing or getting developed a new credit assessment model, based on the scoring of digital footprints of MSMEs in the economy, she had said. It will encompass MSMEs without formal accounting systems, the Budget had announced.
The new MSME credit assessment model is expected to be a significant improvement from the traditional assessment of credit eligibility based only on asset or turnover criteria.
It reflects a significant shift in the way the Indian banking sector would approach financing of small and medium businesses. This new model is expected to help MSMEs, a segment that is often overlooked for credit.
Cons of current system
Till date, banks have primarily relied on external assessments and projections submitted by MSMEs. These have often been supplemented by data from a credit monitoring arrangement (CMA). This approach has its limitations, frequently leading to either under-financing or over-financing of MSMEs, which can hamper their growth and sustainability, according to industry experts.
MSMEs’ contribution in Indian economy
MSMEs play a pivotal role in the growth of the Indian economy, contributing significantly to employment, innovation, and GDP. Accounting for over 30 per cent of the country’s GDP and nearly 50 per cent of its exports, MSMEs form the backbone of India’s industrial ecosystem. With over 63 million enterprises spread across both urban and rural areas, MSMEs are essential for promoting balanced regional development and reducing income disparities.
One of the most significant contributions of MSMEs is job creation, having employed over 110 million people, second only to agriculture. MSMEs absorb a large section of the labour force, including unskilled and semi-skilled workers, thus alleviating poverty and boosting rural income. Furthermore, MSMEs foster entrepreneurship, driving innovation at the grassroots level. Their flexibility allows them to adapt to changing market dynamics, often serving niche markets with tailored products and services.
MSMEs are also key drivers of supply chain integration. They support large industries by providing raw materials, components, and services. Government initiatives like the ‘Make in India’ and ‘Atmanirbhar Bharat’ campaigns underscore the importance of MSMEs in reducing dependency on imports.
Despite their immense contribution, MSMEs face challenges such as limited access to credit, infrastructure bottlenecks, and regulatory hurdles. Strengthening support for MSMEs is crucial for sustaining India’s economic growth and realising its vision of becoming a developed nation by 2047, said economy watchers.