Public Sector Banks (PSBs) in India are preparing to launch an internal credit rating system tailored for Micro, Small, and Medium Enterprises (MSMEs), sources informed CNBC-TV18. This initiative, set to be implemented by the next quarter, aims to ease the financial strain on MSMEs by minimizing their dependence on costly external credit ratings.
The new internal system is reported to be significantly more comprehensive than the existing credit assessment mechanisms used by banks. Unlike traditional models that primarily depend on credit scores, the PSBs’ new approach will consider a variety of factors, including an MSME’s supply chain, digital footprint, and industry-specific conditions. This customized approach is expected to offer a more precise evaluation of an MSME’s creditworthiness.
Currently, banks require MSMEs seeking loans beyond a certain threshold—typically set between ₹40 to 50 crore—to obtain external credit ratings, which can be expensive and add to the financial burden on these businesses. In some cases, even loans below the ₹40 crore mark are subject to this requirement. The new internal system aims to alleviate this burden by reducing or eliminating the need for external ratings.
Sources indicate that significant progress has already been made in developing this system, with banks nearly ready to implement it by the next quarter. This aligns with the proposal made by Finance Minister Nirmala Sitharaman during the Union Budget 2024-25, where she urged PSBs to pioneer a new credit model based on the digital footprints of MSMEs. This initiative is expected to broaden access to credit for MSMEs, particularly those without formal accounting systems.
In the Union Budget 2024, Finance Minister Nirmala Sitharaman stated, “To facilitate greater credit flow to MSMEs, we will introduce a new internal credit rating system which will bring in the benefit of quicker and more efficient credit disbursement to the MSME sector.”
According to industry insiders, the introduction of this internal rating system is a significant step forward in supporting the growth and sustainability of MSMEs in India. By leveraging digital advancements and industry-specific data, the government and PSBs aim to create a more inclusive and supportive financial environment for small and medium enterprises, which are the backbone of the Indian economy.