Beyond Credit Scores: How Digital Lending Models Are Powering SME Credit in India
In today’s data-driven financial ecosystem, traditional credit scores—once the gold standard for assessing creditworthiness—are increasingly supplemented by real-time data analytics, especially in light of the RBI's Digital Lending Directions, 2025, which emphasize transparency and borrower-centric approaches.
Originally designed in an era of limited data and geared towards salaried borrowers with predictable income streams, these models are ill-equipped to evaluate the dynamic realities of digitally enabled, cash-flow-reliant small businesses.
Why the Disconnect Has Widened Post-Pandemic
A majority of MSME loan rejections today are not a reflection of weak business fundamentals but rather of insufficient historical data. In fact, over 68% of MSMEs applying for credit in the past 12 months were “new-to-credit”, yet they accounted for an impressive 61% of total loan originations — highlighting a glaring mismatch between traditional bureau models and ground realities.
Meanwhile, in FY23–24, MSME credit demand surged by 33%, but supply grew only 11%, creating a widening gap. This is not merely a demand-supply mismatch; it’s a structural inefficiency in how creditworthiness is measured and understood.
Traditional models offer a retrospective view of risk, emphasizing repayment history and collateral. But today’s SMEs require working capital decisions based on real-time cash flows, digital sales footprints, and operational velocity—metrics that conventional scoring frameworks are blind to.
Traditional Scores Don’t Reflect SME Financial Health
Legacy credit scoring systems were developed at a time when financial data was limited and borrowing behaviour was relatively stable. These systems still rely on inputs such as Income Tax Returns (ITRs), collateral, and bureau history, which disproportionately favor established borrowers and formal enterprises.
But India’s SME landscape today is far more nuanced. Of the 64 million MSMEs in the country, around 7.7 million (~12%) are considered digitally mature, with the rest at varying stages of digital transformation. Many of these businesses have successfully transitioned to digital marketplaces, QR-based payments, and e-commerce platforms, particularly post-COVID—but such data points are invisible to traditional bureaus.
A Deloitte-FICCI study highlighted that over 85% of Indian SMEs experienced cash flow disruptions during the pandemic, pushing them to adopt alternative sales and collection channels. Yet these operational pivots—which reflect adaptability and resilience—don’t factor into conventional credit models.
Additionally, working capital challenges stemming from supply chain delays, vendor defaults, or seasonal demand fluctuations often penalize small businesses in traditional scoring systems, even if they continue operating successfully through informal arrangements.
Get Real-Time Working Capital SolutionsWhy Traditional Models Are Unfit for India’s 64 Mn SMEs
India’s SMEs are not a homogeneous group. They span geographies, sectors, and maturity levels—from family-run stores in Tier 3 towns to digitally native startups in metros. Yet, traditional risk assessment models treat them with a one-size-fits-all approach.
Only 11% of Indian MSMEs have access to formal credit. The rest remain excluded—especially first-time entrepreneurs, women-led businesses, and unregistered enterprises—not because they are unviable, but because they do not meet the criteria of legacy systems.
The Rise of Alternative Credit Models: Real-Time and Contextual
A new wave of innovation is rewriting the rules of SME underwriting. Fintechs and digital lenders are at the forefront of this revolution, shifting the lens from "what was" to "what is" by leveraging real-time data, behavioural analytics, and AI-based models.
Instead of relying solely on retrospective data, these platforms tap into:
- Real-time transaction and settlement data
- Payment gateway and UPI activity
- ERP system integrations
- Inventory and supply chain dynamics
- GSTN trails and invoice lifecycle patterns
These alternative credit models ingest millions of micro-signals to assess creditworthiness, offering a dynamic, adaptive, and more equitable view of risk. Fintech lenders reported 25-30% higher approval rates, thereby directly impacting underwriting cost ratios. At scale, these translate to much lower underwriting and operating costs. This model also enables lenders to originate efficiently by segment the market and monitor existing lenders on real time cash flows. Eventually these combine to substantially reduce credit losses.
Importantly, these practices are now reinforced by the RBI’s 2025 guidelines that require all loan agreements to be digitally signed and shared with borrowers, along with a Key Fact Statement (KFS) outlining terms clearly bringing alignment between fintech agility and regulatory transparency.
Real-Time Working Capital Intelligence in Action
Fintechs are turning what was once “data exhaust” into actionable underwriting intelligence. By integrating directly with systems such as GSTN, bank accounts, ERP, POS, and e-commerce platforms, they are powering Smart Credit Limits—real-time adjustable loan limits based on actual cash flow.
One emerging innovation is invoice-level analytics, which enables lenders to dynamically adjust credit lines based on debtor aging, repayment velocity, and payment cycles. Some platforms even offer instant working capital lines to suppliers, settling funds within hours based on verified invoices—drastically reducing turnaround times.
Another game-changer is revenue-based financing, where repayments are linked to a borrower’s future sales, not fixed EMIs. This model is especially suited for D2C brands and early-stage startups with fluctuating revenue cycles.
Cash Flow Is the New Collateral
Perhaps the most radical departure from the past is the redefinition of collateral. Instead of relying on land, property, or gold, fintechs now underwrite based on predictable digital cash flows, pending receivables, and even platform trust scores.
Platforms like RBI-backed TreDS allow SMEs to discount their invoices in real-time. Businesses no longer have to wait 60–90 days for customer payments—they can access funds the very next day, improving liquidity and business continuity.
This shift to activity-based underwriting bridges the historical gap between eligibility and actual business need, while adhering to the RBI’s updated directions on responsible lending, consented data use, and borrower protection.
Cashflow solutions for SMEsA Regulatory Push Towards the Post-Score Economy
The regulatory landscape is evolving to support this shift. The RBI's Digital Lending Directions, 2025, reinforce frameworks like the Account Aggregator (AA), promoting consent-based data sharing and real-time financial insights, crucial for accurate SME credit assessments.
Though borrower signups and current account integrations are still ramping up, we are rapidly moving toward a 360° real-time view of an SME’s financial health—unlocking faster and more inclusive credit decisions.
The updated guidelines also introduced a public directory of Digital Lending Apps (DLAs), ensuring that MSMEs can identify credible lending platforms and avoid fraud—an important safeguard in a tech-first lending ecosystem.
Unified Lending Interface (ULI): The New Rails for MSME Credit
ULI is India’s latest step toward embedded and interoperable credit infrastructure, designed to standardize how lenders, LSPs, and borrowers interact. Built atop India Stack using Account Aggregator, OCEN, eKYC, and DigiLocker, ULI enables real-time access to consented financial data for faster, data-driven loan decisions. Pilot results in the agri-lending space saw loan disbursal times shrink from 4–6 weeks to under 10 minutes. For MSMEs, this could mean a significant reduction in loan processing time.
Globally, countries like Singapore and the UK are advancing open banking and trust-based frameworks to facilitate ecosystem-led lending. India, with its integrated stack—UPI, GSTN, AA, OCEN, ONDC—is uniquely positioned to leapfrog outdated credit systems and set global benchmarks in SME financing innovation.
It’s time to rewire risk. Because the next wave of growth won’t be scored—it will be sensed, streamed, and smartly underwritten.
Think Working Capital… Think CredAble!