Potential of alternate data and credit assessment practices in the MSME space (including comparisons with current practices)

Abstract

This report critically examines the pivotal role of the Micro, Small, and Medium Enterprises (MSME) sector in the Indian economy and explores its growth potential, particularly in the context of small-ticket credit and digital financing. Despite its strategic importance, the sector remains significantly underserved by the formal financial ecosystem, facing a persistent credit gap that impedes scalability and innovation. Through an in-depth analysis of both primary and secondary data, including interviews with over 15 credit officials across public and private sector banks, NBFCs, FinTechs, and small finance banks, this study sheds light on the limitations of conventional credit assessment frameworks and the systemic issues hindering effective credit delivery. Key focus areas include the inefficiencies in traditional bank evaluation mechanisms, the risk-averse nature of asset-backed lending models, and the lack of dynamic underwriting tools tailored for MSMEs. The study further explores the scope of alternative credit assessments, such as psychometric analysis and social-based evaluation, and evaluates their integration potential within the Indian financial landscape.

Special emphasis is placed on the implications of the Digital Personal Data Protection Act, 2023, and the transformative role of India’s emerging digital public infrastructure—including the Open Credit Enablement Network (OCEN), Account Aggregator Framework, and ONDC—in redefining data consent, sharing, and utilization. The paper also investigates the Reserve Bank of India’s evolving stance toward modern credit methodologies such as production-linked, cash flow-based, and turnover-based lending, with a view to enabling more inclusive and responsive MSME financing models.

Ultimately, the report outlines a forward-looking vision for digitally enabled, borrower-centric, and contextually adaptive lending systems that could unlock the latent potential of India's MSME sector and bridge the existing credit divide.