Expanding formal credit access to MSMEs requires building information infrastructure, not dismantling risk mechanisms. Discuss with reference to tools such as the Unified Lending Interface, alternative credit scoring, and Sarfaesi reforms.

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Introduction: In credit markets marked by information asymmetry, sustainable inclusion requires robust data architecture—tools like the Unified Lending Interface (ULI), alternative credit scoring, and SARFAESI reforms aim to enable this.

Body: The Unified Lending Interface (ULI)—modelled on UPI—seeks to create a consent-based, interoperable digital layer connecting lenders with verified borrower data (GST, bank statements, e-invoices). This reduces search and transaction costs, enables faster underwriting, and standardises access across banks and NBFCs. Complementing this, alternative credit scoring leverages cash-flow data, digital payments history, utility bills, and platform data to assess creditworthiness of thin-file MSMEs, shifting from collateral-based to cash-flow-based lending. Together, these tools mitigate adverse selection and expand access without diluting risk assessment.

Reforms to the SARFAESI Act, 2002—including improved enforcement and digitisation of collateral registries (e.g., CERSAI)—strengthen recovery mechanisms, enhancing lender confidence. Faster resolution reduces expected losses, allowing lenders to price loans more competitively. However, gaps remain: data fragmentation, privacy concerns, uneven MSME digitalisation, and limited standardisation across states constrain the effectiveness of ULI and alternative scoring. Over-reliance on algorithms can also embed biases or misprice risk if data quality is poor.

Thus, dismantling collateral requirements without strengthening such infrastructure risks higher NPAs and credit rationing. Instead, a layered approach—combining information-rich underwriting, partial credit guarantees (e.g., CGTMSE), and efficient enforcement—can expand credit sustainably.

Conclusion: Building a robust information and enforcement ecosystem is key to MSME credit deepening, ensuring inclusion without compromising financial stability or lender confidence.

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