Journal of African Development

Micro, Small, and Medium Enterprises (MSMEs) are recognized as one of the most important contributors to economic growth, employment generation, industrial output, and entrepreneurship development in India. Despite their economic significance, MSMEs frequently encounter difficulties in accessing formal financial services due to the perceived credit risk associated with lending to small businesses. Commercial banks often classify MSMEs as high-risk borrowers because of inadequate collateral, irregular cash flows, limited financial documentation, operational informality, and insufficient credit history. These perceptions significantly influence loan approval decisions, interest rates, collateral requirements, and the overall availability of institutional finance for MSMEs.

The present study examines the determinants of credit risk perception of commercial banks towards MSMEs in India. The research focuses on identifying the major financial, operational, institutional, and behavioral factors that influence commercial banks’ assessment of MSME creditworthiness. The study explores variables such as collateral availability, financial transparency, repayment capacity, business stability, market uncertainty, industry risk, digital financial records, and government support mechanisms. Additionally, the study investigates how technological advancements, digital banking systems, and regulatory policies influence banks’ risk assessment practices.

The research adopts a descriptive and quantitative research design. Primary data was collected from bank officials, MSME owners, and financial professionals using structured questionnaires based on a five-point Likert scale. A sample size of 300 respondents was selected for the study. Statistical tools including percentage analysis, correlation analysis, regression analysis, mean analysis, and hypothesis testing were used for data interpretation. Secondary data was collected from RBI reports, research journals, MSME ministry publications, and banking sector reports.

The findings reveal that collateral security, financial documentation, repayment history, and business stability are the most significant determinants of credit risk perception among commercial banks. The study further reveals that digital financial records and government credit guarantee schemes positively influence lending confidence. The research concludes that improving financial transparency, strengthening digital financial ecosystems, and enhancing MSME financial literacy can reduce perceived credit risk and improve institutional credit accessibility.....