Policy on Credit Rating for MSMEs | 12 Nov 2019

Why in News

The government is in the process of formulating a policy on credit ratings for micro, small and medium enterprises (MSMEs) to help investors and other players take an informed decision.

• The government plans to start digital data-based credit system.

Key Points

• Challenges with the current system-
  
  • Under-served: MSMEs have remained largely under-served by Financial Institutions despite their contribution to the economy.
  • Creditworthiness: It is a difficult task for banks and financial institutions to assess the creditworthiness, choosing enterprises with good CIBIL score, detailed audited financial statements or have assets to offer as collateral.
  • Availability of Finance: Service-oriented SMEs are unable to mortgage their equipment against loans like the manufacturing sector, posing a challenge for them to avail finance.
  • Credit Flow: There is a gap in the availability of funds to the SMEs and the government's focus on increasing credit flow to this segment which needs to be filled up.
• How will the digital data-based credit system help the sector?
  
  • Alternative credit scoring based on digital data gives the lender a more holistic view of a borrower's creditworthiness and associated risks for credit underwriting.
  • New sources such as transaction data and surrogate data like utility payments, bill payments give a detailed view of the business.
  • Deploying credit underwriting mechanisms powered by advanced technologies such as Artificial Intelligence (AI), machine learning and data analytics can provide useful insights.
  • Each of the data points can be treated as variables for credit appraisal and can be assigned specific weightage depending on the nature of the businesses within the overall MSME segment.

Source: TH