New Credit Assessment Model for MSME Loans

Government banks are now preparing to offer loans up to ₹25 lakh to micro and small enterprises based on a new credit assessment model. This model relies on cash flows such as digital transactions, salaries paid to employees, electricity bills, municipal taxes, and contributions to the Employees’ Provident Fund—rather than traditional parameters like tax returns and collateral.

Under the new credit assessment model proposed in the July budget, banks will provide both working capital and long-term loans. A common application form is also being prepared.

Currently, at least one year of Income Tax Return (ITR) is mandatory for working capital loans, and three years of ITR for term loans. In addition, a six-month bank statement and 12-month sales details are required if the business is not registered with GST.

In her budget speech, Finance Minister Nirmala Sitharaman stated that to make credit more accessible for MSMEs, public sector banks should develop their internal capability to assess MSMEs for loans instead of relying on external evaluations. She said they should also take the lead in developing a new credit assessment model based on the scoring of MSMEs’ digital footprints in the economy. Compared to traditional assessments based solely on asset or turnover criteria, this is expected to be a significant improvement.

In a recent report, industry association Assocham noted that innovative financial solutions are needed for MSME growth. It urged banks to improve transparency in loan approval processes and to eliminate unused loan charges.

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