India should harness UPI data to unlock credit for small businesses

Transaction records generated through India's UPI platform could serve as a valuable tool for assessing creditworthiness and pricing risk more accurately, according to Ashok Lahiri, a policy expert at NITI Aayog. The shift would help mainstream hundreds of thousands of MSMEs that currently operate outside the formal banking sector, he indicated.

UPI's vast transaction network captures real-time payment patterns and cash flow data from millions of businesses and individuals. This information, when analyzed properly, could provide lenders with a clearer picture of a borrower's financial health and repayment capacity than traditional assessment methods that often rely on collateral or credit history.

The proposal addresses a persistent challenge in India's financial landscape: extending formal credit to small enterprises that lack the documentation or asset base typically required by banks. MSMEs form a critical part of the economy, generating employment and contributing to GDP, but many struggle to access affordable credit due to stringent lending criteria.

By tapping into existing UPI data, financial institutions could reduce their appraisal costs while expanding their lending base. Such a move could accelerate financial inclusion while simultaneously improving credit quality through better risk assessment mechanisms. The approach aligns with India's broader digitalization push and its efforts to strengthen the formal economy.