This paper examines monetary policy transmission mechanisms through digital lending channels in global micro enterprise markets, with a focused empirical and institutional analysis of regulatory compliance constraints and market failure dynamics in India. Conventional theory emphasizes transmission via interest rate, credit channel, and balance sheet mechanisms in traditional banks; however, in emerging market economies with deep financial inclusion gaps, an alternative layer of transmission has emerged through algorithmically driven digital lending platforms leveraging UPI based payment infrastructures, GST filing records, and account aggregator linked transactional data. The study shows that digital lending channels transmit policy rate changes more rapidly and fully than traditional bank lending, with stylized results indicating higher elasticities of APR adjustment in digital lending portfolios. Moreover, alternative credit worthiness valuation mechanisms—integrating UPI cash flow patterns, GST filing consistency, and AA linked data—materially expand credit access for micro enterprises, raising approval rates from 30% (CIBIL only) to 62% (hybrid), increasing average ticket sizes from ₹75,000 to ₹220,000, and reducing default rates from 8.2% to 4.7%.

Yet regulatory compliance frictions—including RBI Digital Lending Directions 2025 and DPDP 2023 constraints—create market failure dynamics by pricing out ultra thin file borrowers and reinforcing dual credit markets: a regulated, data rich segment and an informal, exclusionary segment. The paper argues that regulators should formally recognize, standardize, and prudentially incentivize alternative data based credit worthiness models as core components of the formal lending and macroprudential architecture, thereby enhancing monetary policy transmission, financial inclusion, and risk discipline in under penetrated micro enterprise markets globally.