India’s economic future depends on the strength of its small businesses. Micro, small, and medium enterprises (MSMEs) contribute nearly 30% to India’s GDP and provide employment to more than 110 million people. But despite their size and importance, they remain one of the most underfunded parts of the economy. Their biggest challenge is simple: they cannot access affordable and timely credit.
Most small businesses do not have enough collateral, long credit histories, or direct relationships with banks. This limits their ability to grow, innovate, hire more workers, or survive financial shocks. As India aims to become a global manufacturing and services hub, solving the MSME credit problem is not just a sectoral concern—it is a national priority. Without stronger credit access, India’s growth goals will remain incomplete.
To unlock the full potential of small businesses, India needs bold reforms, broader financial partnerships, and modern digital tools that make lending simpler, safer, and more inclusive.
Many fintech lenders and non-banking financial companies (NBFCs) are ready to serve MSMEs, especially those that traditional banks cannot easily reach. These lenders are often more flexible, faster, and willing to take risks. But they face a major disadvantage: they borrow money at a much higher cost compared to banks, especially when they offer unsecured loans. The cost difference can be as high as 7–8 percentage points, which makes lending expensive.
One solution is to open new and cheaper sources of funding for these lenders. Allowing more foreign investment or insurance capital to flow into fintechs could reduce borrowing costs. The government can also introduce incentive schemes—similar to priority-sector norms in agriculture—to encourage NBFCs to lend to MSMEs at reasonable rates. Public sector banks should also be supported to partner with fintechs through co-lending models, combining the strengths of both systems.
Today, MSME loans fall under priority sector lending (PSL). However, many younger or lower-rated NBFCs do not qualify for PSL benefits because banks require high credit ratings to work with them. This excludes some of the most innovative companies from participating. By creating a more flexible incentive structure, the government can ensure a wider and healthier flow of credit to small businesses.
Another critical area is credit guarantees. Government schemes like the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) play an important role by sharing the risk of loans given to small businesses. But the current design needs improvement. For example, guarantees do not easily transfer when loan portfolios are sold to another lender, and they may not adequately support co-lending models. Differences in pricing rules between banks and NBFCs also make it harder for smaller lenders to compete fairly.
Updating and simplifying these guarantee systems will encourage more lenders to support MSMEs, reduce risk, and expand credit access.
ALSO READ: Kejriwal’s swift ascent contrasts with Kishor’s early setback in debut political battles
ALSO READ: Understanding hypotension: Signs, reasons, and when it becomes serious
India has made impressive progress with digital public infrastructure, but MSME credit requires even more robust systems. A major improvement would be to expand the Account Aggregator framework to cover not just individuals but also businesses, companies, and partnerships. This would give lenders access to verified financial information in a secure, consent-based manner.
Simplified online verification through GST, PAN, Udyam registrations, and other public APIs should be made widely available. Lenders should also be allowed to access key data—after taking consent—without multiple credit bureau pulls, which can unintentionally harm a borrower’s credit score. A single digital KYC process should be created, especially for small proprietorships, so that MSMEs do not have to repeat the same verification multiple times. Alternative methods like bank account verification or verified addresses from e-commerce platforms can also help fill data gaps.
Fraud remains a major concern for lenders, especially when dealing with small businesses that may lack formal documentation. Public APIs that instantly verify PAN-Aadhaar linkage, GST numbers, and Udyam certificates will reduce this risk. They will also make compliance easier for genuine businesses that want to borrow responsibly.
These steps will create a cleaner, faster, and more trustworthy credit pipeline.
India is at a crucial turning point. The country’s digital infrastructure, entrepreneurial energy, and growing financial ecosystem have created unprecedented opportunities for small businesses. But unless the credit bottleneck is solved, MSMEs will struggle to achieve their true potential.
The government, regulators, and financial institutions must recognise the urgent need to modernise the lending ecosystem. This includes formally recognising a new category of fintech MSME lenders, designing incentive structures that reduce capital costs, updating credit guarantee schemes, enabling cash flow-based lending, and building stronger data systems.
With these reforms, MSMEs will finally receive the financial support they need to grow, innovate, and contribute fully to India’s economic transformation. Strengthening MSME credit access is not just about fuelling business growth—it is about powering the nation’s future.
Copyright © © 2022 Copyright. All Rights Reserved with Arth Parkash