The 30th Standing Advisory Committee (SAC) in Coimbatore on October 27, 2025, highlighted the urgent need for Micro, Small, and Medium Enterprises (MSMEs) lending models to shift from a traditional collateral-based approach to cash-flow-based lending. This strategic realignment is critical for overcoming the current challenges faced by MSMEs. As per a survey of 2,000 MSMEs, the sector still has an addressable credit gap of about 24% or ₹30 lakh crore.
Coupled with digital tools, the RBI push can improve credit access for the MSME sector. The main focus of the committee was to revitalise credit flow to MSMEs through a multi-pronged strategy.
The RBI MSME lending guidelines aim to boost credit flow through various measures, such as encouraging collateral-free loans up to ₹10 lakh, establishing the Trade Receivables Discounting System (TReDS) for delayed payments, advising banks to link interest rates to an external benchmark, and facilitating access to credit through new technology like the Account Aggregator (AA) framework.
The significant impact of this shift is that lenders need to rethink their credit evaluation and servicing processes. The following discussion highlights what adopting cash-flow lending means for your approach to lending.
What is Cash-Flow Lending?
The cash-flow lending approach for MSMEs assesses how money moves through a business, including what comes in and what goes out, and how predictable these flows are. Lenders assess a borrower’s creditworthiness based on their digital transactions, invoices, and payment patterns to evaluate real-time business health, rather than relying on collateral or historical credit history.
Lenders can also use alternative data sources, such as bank statements, GST returns, and UPI transactions, to get insights into a business’s actual revenue generation and repayment capacity. Based on these inputs, lenders can make data-driven decisions, especially for businesses that lack assets for collateral.
To understand this approach, below we discuss how cash-flow based lending works.
Lenders analyse various data points, including bank statements, GST returns, and point-of-sale data, to get a real-time picture of the business’s financial health.
Using this approach, lenders have access to the updated information on cash inflows and outflows, which provides an accurate view of the business’s ability to repay a loan compared to traditional methods.
The model also relies on technologies like the AA framework, which enable secure data sharing and faster processing by creating a digital link to a borrower’s financial data. The AA framework facilitates the seamless, consent-based sharing of financial data to gain a comprehensive picture of a business’s financial health and reduce information asymmetry. RBI MSME guidelines also promote the use of the Trade Receivables Discounting System (TReDS). This platform addresses the problem of delayed payments to MSMEs by enabling invoice-based financing, a form of cash-flow based credit.
Cash-Flow Based Lending Versus Traditional Approach
Traditional lending models heavily rely on collateral and detailed documentation, which often excludes MSMEs with no or limited credit history. Cash-flow based lending, on the other hand, facilitates banks and NBFCs to lend by evaluating the repayment ability of the business.
The table below highlights the key differences between cash-flow and traditional lending.
Impact on Your Lending Strategy
This RBI MSME guideline, prioritising cash-flow lending, calls for a strategic shift for lenders. Here’s how you can realign your operations:
Adopt an Updated Credit Assessment Framework
Lenders need to develop analytics capabilities to assess future cash-flows, volatility, seasonality, and sectoral risk, and price loans accordingly to transition to cash-flow-based lending. For example, lenders can base their credit assessment on analysing GST returns, e-invoices, and POS data, which provide insight into sales patterns. Inventory levels analysis and supply chain data also help assess the cyclicality of working capital. Finezza’s Loan Origination System provides detailed credit assessment that integrates GST returns, bank statements, and credit bureau data for comprehensive cash-flow analysis.
Technological Infrastructure to Integrate New Data Sources
Lenders need the right technology and infrastructure to support their cash-flow-based lending decisions. They must integrate digital and consent-based data sources, the GST returns that show actual sales and purchase trends, Invoice Discounting Data for information on receivables quality and buyer profiles, and more.
Integrating with third-party platforms offers them a dynamic rather than static assessment, which is dependent on “past financials,” but looks at real-time cash-flow health. Finezza offers a complete suite of integrations that allows lenders to integrate with an account aggregator and access the required updated information without compromising data security and privacy.
Innovative Product Design
Lenders can offer MSMEs working capital lines or revolving credit based on receivables and aligned with real cash-flow cycles, rather than offering traditional fixed-term loans secured by assets.
Shorter-term credit lines, aligned with the operating cycle and featuring frequent renewals, work better for cash-flow lending. Digital tools and automation are instrumental in reducing cost, offering timely access to credit, faster onboarding, and improved monitoring.
Risk Management
Cash-flow lending models face risks due to a combination of factors like sudden downturns in demand, seasonality, delays in receivables, and concentration risk. Cash-flow lending requires higher monitoring and more frequent reviews. Lenders should have early warning indicators and real-time monitoring systems to address these challenges effectively.
Recovery frameworks must be adaptable, emphasising less on repossessing assets and more on managing workflows, factoring, and receivables management. Risk-adjusted pricing, with possibly higher spreads for MSMEs that have less certain cash-flows, can help lenders manage this risk effectively.
Finezza offers an LMS that facilitates complete collection and reconciliation, and proactive loan monitoring for effective risk management.
Key Takeaways
RBI’s backing of cash-flow lending signals a structural shift in MSME credit evaluation and underwriting. It offers lenders an opportunity to adopt a modern, data-driven approach to lending and promotes the financial inclusion of a large underserved MSME community.
However, at the same time, it demands strategic investment in analytics, product redesign, monitoring infrastructure, and risk management. Emerging and innovative technology can help lenders adapt their lending strategy to the new RBI MSME guidelines without compromising on portfolio quality.
Finezza offers a powerful Loan Origination System (LOS) that simplifies underwriting, automates workflows, and reduces credit risk. The LOS offers tech-driven Credit Assessment, which bases its evaluation on Bank Statement Analysis and Financial Statement Analysis of the applicant to help lenders get a dynamic view of the applicant’s cash-flow trends. The LOS also facilitates easy integration with APIs (GST and Credit Bureau) and offers a credible data source to facilitate data-driven decisions.
Ready to align your lending operations with RBI’s cash-flow framework? Reach out today to see how our Loan Origination System can help you unlock new opportunities for growth and financial inclusion.
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