Working as credit professionals in a public sector bank and dealing with MSMEs (Micro, Small, and Medium Enterprises), over the years i have learnt that traditional methods like credit scores and collateral are only part of the story. Banking transactions are the real life evidence of how an MSME manages its income, expenses, and cash flow. Learning to interpret these transactions is crucial for fair, accurate credit assessments and for supporting genuine business growth.
Most of the MSMEs often ask me:
“Why do you need my bank statements if you’ve seen my balance sheet?”
And everytime i have to give the same reason this is because bank transactions show the truth behind the turnover. While financials are annual and editable, banking data is real-time, raw, and revealing.
What Are Banking Transactions, and Why Do They Matter?
Banking transactions are every deposit, withdrawal, transfer, and payment made through a business’s bank accounts. For MSMEs, whose formal credit history may be limited or incomplete, these everyday entries provide a living diary of financial health.
Here’s why they are essential:
- Reveal True Cash Flows: You see actual earnings, expenses, bill payments, salaries paid, and seasonal variations exactly how the MSME operates day to day.
- Substitute for Credit History: Many MSMEs lack a long credit file or large collateral. A healthy banking history can demonstrate reliability in the absence of a “score”.
- Detect Risk Early: Frequent bounced cheques, irregular cash deposits, or unexplained large transfers may signal risk even if financial statements seem healthy.
- Enable Flexible Lending: By reading transaction behaviour, lenders can offer customised loans, repayment periods, or working capital needs
How Do MSME Lenders Use Banking Transactions?
- Reviewing Bank Statements- Lenders often ask for 6–12 months of bank statements and check regular inflows (sales, payments from customers) and outflows (supplier payments, rent, utilities).
- Identifying Cash Flow Patterns- Cash flow patterns often answer these questions to lender- Are earnings steady or seasonal?, Are payments to suppliers timely? How much working capital does the business maintain? etc
- Assessing Financial Discipline- Recurrent overdrafts or cheque bounces gives the broader picture of financial discipline horizon. Financial discipline also includes taxes, loan EMIs, and salaries paid on schedule.
- Cross-Checking Against Submitted Financials- Do statement cash flows align with reported sales and profits? & Are there unexplained large deposits or frequent cash transactions?
How Credit Officers Can Use Bank Statements:
- Cross-check turnover declared in CMA
- Validate stock/debtor figures with actual transaction pace
- Detect layering, misuse, or undisclosed borrowings
- Score account conduct with real metrics
- Look for Consistency, variability in deposits or unexplained gaps may be risk flags.
- Understand Sectoral Factors, for example, a seasonal business will have fluctuating inflows and outflows context is key!
- Keep Learning new digital credit models which use a “score” based on digital financial behaviour get familiar with these systems
Recent Developments: Digital Footprints & Automated Assessment
Today, digital tools and open banking allow for instant, accurate analysis:
- MSMEs can authorize direct data sharing; banks use automated tools to analyze bank statement data, GST filings, and even invoice payments.
- This process speeds up approvals, focuses on objective data, and increases access for MSMEs with little or no collateral
Quick Tip:
“Financials show what the business wants to be. Banking shows what the business actually is.”
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