Scope of AI & Machine Learning Reshaping India’s Credit Sector 

Despite strict regulations and fundamentals, the Indian economy faces a critical dip in credit, which is a vital influence on economic growth. An accurate indicator for this is the credit-to-gross domestic product (GDP) ratio, which is 50% for India, with comparison to China who has 177%. 

This mostly creates a dire impact for micro, small and medium enterprises (MSME) and nano-SME borrowers as the current banking system does not offer them help in the name of high operational costs and other technical difficulties. 

This is where the scope for Artificial Intelligence (AI) lies. 

According to ICRA estimates there was a 14-16% growth in credit predominantly by unsecured loans of small value in the financial year 2024, even though it appears to be pleasing initially, it comes with certain shortcomings including the possibility of poor lending practices like over indebtedness and mediocre underwriting inducing the Reserve Bank of India to tighten the lending norms. This was done to depress credit growth rates to between 11-12% in the financial year 2025, underscoring the importance of risk management in giving out small loans. 

The role of AI is to understand and measure the creditworthiness of a loan recipient by understanding his ability and willingness to repay. This is done using several steps including:  

• Credit decisioning: Using AI/ML techniques in credit decisioning to analyze credit bureau reports to analyze the user’s ability to repay. 

• Detecting fraud: AI can be used to monitor the loan recipient’s behavior during loan applications, including their copy paste tendencies, data correction frequency, changes in connectivity, etc., thus analyzing the integrity of the user. 

• Early warning signs: Once the loan is allowed, financial institutions must monitor repayment patterns correctly to make sure that the money is paid back on time. 

• Operational efficiency and improved collection efficiency: AIs can increase the operational workflow by learning and automating actions typically done by operations teams. They can also help in recording repayment patterns, preferred modes of payment etc. enabling uninterrupted collections.  

With the help of appropriate AI/ML, financial institutions can improve the quality of collected data and offer appropriate solutions. 

This can mostly help two groups of debtors- women who might need loans for running small businesses and rural and semi-urban borrowers where proper risk assessments need to be deployed to collect data for allowing credit. The AI system can help financial institutions in deciding how and to whom credit is delivered in a way that increases India’s economic growth.