Digital Payments and MSME Credit Access in India: UPI, Data Trails and the Formalisation of Small Business Finance

Micro, small and medium enterprises (MSMEs) are central to India’s output, exports and employment, yet many remain excluded from formal credit because lenders lack reliable information about their cash flows. The rapid spread of the Unified Payments Interface (UPI) has changed this situation by creating digital records of everyday business transactions. Alongside the Account Aggregator framework and other elements of India’s digital public infrastructure, these records could allow lenders to assess small firms on the basis of their actual cash flows rather than collateral. This paper examines whether and how digital payment adoption improves MSME access to formal credit. It is based on an integrative review of research in finance, development economics and information systems, supplemented by official data and policy documents. The review finds consistent evidence that the information asymmetry between lenders and small firms is the core barrier to MSME credit and that digital transaction data can reduce it. Emerging evidence from India links growth in digital payments to an expansion of credit, particularly from fintech lenders. Drawing on credit rationing theory and the lending technologies framework, the paper proposes the Digital Payment–Credit Pathway Framework, which traces how payment data become credit access and identifies the conditions and risks that shape this process. Implications for MSME owners, lenders and policymakers are discussed.