Work begins on credit index for MSMEs to boost funding

The proposed index will rate companies across industries using common parameters, helping lenders evaluate borrowers with weak financials, limited documentation, or minimal transaction history, multiple people aware of the development told ET.

The initiative is part of the broader plans to form a National Trade Finance Committee and create a framework for expanding export credit, they said.

“This is being evaluated to see if an industry-wide index with common parameters can be worked out,” an industry executive said, requesting anonymity. Lenders can extend credit based on the index ratings, “and this would reduce the time between credit appraisal and loan disbursement,” he said.

The initial discussions involve the commerce and industry ministry, finance ministry, Reserve Bank of India and Exim Bank, the person added.

An official said such an index can be worked out once public sector banks (PSBs) have formalised the new credit assessment model for micro, small, and medium enterprises (MSMEs), as announced in the July budget. “Let that model be rolled out, and based on those parameters, a scoring index can be developed, which will grade MSMEs, and based on that, financial institutions can decide to extend credit facilities,” he said.Banks are expected to soon launch the model based on MSMEs’ digital footprints.Industry representatives said discussions have happened on the need for banks to develop their own system of credit rating as many MSMEs can’t access the expensive services offered by credit rating agencies.

“We need to develop a credit rating system across banks that is acceptable to all the stakeholders,” an industry representative said. “However, this could have some issues because banks have different risk perceptions.” The government has increased the lending target for banks to MSMEs in the current financial year by nearly 35% to ₹5.7 lakh crore.

Finance minister Nirmala Sitharaman announced this increased target last week, noting that state-owned banks’ outstanding loans to MSMEs have grown 9.2% over the last two financial years, while private banks and non-banking financial companies (NBFCs) have shown 25% and 39% growth, respectively.

The government is soon expected to give cabinet approval for the proposed ₹100-crore credit guarantee scheme for MSMEs announced in the budget this year.