Critical Evaluation of Credit Scoring Models Implemented in PSBs in India with Reference to MSME Sector

Abstract

This research paper critically evaluates the credit scoring models currently implemented by Public Sector Banks (PSBs) in India for the Micro, Small, and Medium Enterprises (MSME) sector. The MSME sector forms the backbone of the Indian economy, contributing significantly to GDP, manufacturing output, and employment generation. However, access to formal credit remains a significant challenge for these enterprises. This study examines various credit scoring methodologies adopted by PSBs, analyzes their effectiveness in accurately assessing creditworthiness, and identifies shortcomings in current frameworks. Through both secondary and primary research, this paper evaluates traditional and alternative data-driven models, their implementation challenges, and their impact on credit disbursement to MSMEs. The findings reveal significant scope for improvement in existing credit assessment frameworks, highlighting the need for more adaptive, technology-driven approaches that can better capture the unique financial characteristics of MSMEs while managing risk effectively. Recommendations include integrating behavioral and psychometric parameters, adopting machine learning algorithms, and creating sector-specific scoring models that can enhance financial inclusion while maintaining portfolio quality.