Digital lending: The future of MSME credit in India

Abstract

Micro, Small, and Medium Enterprises (MSMEs) hold critical significance in the growth of Indian economy, yet persistent credit constraints limit their growth and competitiveness. Over the past few years, the convergence of digital payments (particularly the Unified Payments Interface, [UPI]) FinTech innovation and digital public infrastructure (DPI) have revolutionized MSME financing in India. This article offers a policy-oriented review of India’s evolving digital lending ecosystem, with a focus on the role of FinTech-NBFC partnerships, alternative data-driven of credit assessment and emerging frameworks such as the Unified Lending Interface (ULI), Open Credit Enablement Network (OCEN) and the Account Aggregator (AA) ecosystem. Drawing on secondary data from regulatory institutions, multilateral organizations and industry reports, the paper synthesizes recent developments in digital lending and MSME credit delivery during the period of 2016-2025. Furthermore, the analysis suggests that digitalization has the potential to reduce information asymmetries and transaction costs, thereby expanding access to formal credit for Indian MSMEs. However, issues of data privacy, regulatory coordination and governance remain pertinent. The article concludes that while digital lending offers a promising solution to bridge the credit deficit for Indian MSMEs, its long-term effectiveness will depend on the development of adaptive, robust and interoperable regulatory frameworks that foster innovation and contribute to a more efficient and inclusive financial ecosystem.