Early-Warning Red Flags For MSME Credit Risk: A Playbook For Lenders (Non-Fraud Focus)
- IJLLR Journal
- 21 minutes ago
- 1 min read
Adv. Khushboo Kejriwal, Advocate, PhD Scholar (Financial Management), Neville Wadia Institute of Management and Research, Affiliated to Savitribai Phule University of Pune.
Dr. Tanaji Chavan (Research Guide), Neville Wadia Institute of Management and Research, Affiliated to Savitribai Phule University of Pune.
ABSTRACT
India's Micro, Small, and Medium Enterprises (MSMEs) contribute 30% to GDP and employ over 110 million people, yet remain vulnerable to credit stress due to thin capital buffers and information asymmetry. This article presents a comprehensive framework for Early-Warning Systems (EWS) specifically designed for MSME credit risk management, distinct from RBI's fraud-focused Red-Flagged Accounts mechanism.
Drawing on international research and Indian regulatory requirements, we propose a five-dimensional red-flag matrix incorporating payment behaviour, compliance signals, operational metrics, banking patterns, and market intelligence. The framework integrates traditional financial ratios with real-time data from India's digital infrastructure—including GST e- invoicing, TReDS platforms, and Account Aggregator networks—to provide 3-6 months advance warning of potential defaults.
Through case studies and sector-specific analysis, the article demonstrates how timely EWS implementation can facilitate early intervention, preserve borrower relationships, and improve recovery outcomes. The proposed system aligns with RBI's 2002 Credit Risk Management Guidelines, 2014 Distressed Assets Framework, and 2024 Fraud Risk Management Direction while addressing data protection requirements under the Digital Personal Data Protection Act, 2023.
Key recommendations include establishing parallel workflows for credit deterioration versus fraud detection, leveraging India-specific data sources for enhanced predictive power, and implementing robust governance frameworks that balance risk identification with borrower fairness. The framework offers Indian lenders a practical, regulation-compliant approach to MSME credit monitoring that can strengthen financial stability while supporting continued credit flow to this critical economic sector.
