Introduction: The Economy Runs on Banks — and MSME’s
Behind every growing economy is a financial system that fuels its movement — and a network of enterprises that bring it to life. At the heart of this relationship lies a fundamental truth: banks and businesses are interdependent, and their success drives the prosperity of nations.
Banks act like the arteries of the economy — collecting savings, distributing loans, and ensuring that money flows into productive sectors. But if banks are the arteries, then Micro, Small, and Medium Enterprises (MSMEs) are the capillaries — smaller in scale, but just as vital. They reach deep into the corners of society and economy, carrying innovation, jobs, and resilience where larger businesses often do not tread.
In India, MSMEs are not just side players. They are foundational to the economic story:
- Contributing about 30% to India’s GDP
- Generating nearly 45% of total exports
- Providing employment to over 110 million people
- Supporting localised entrepreneurship in both urban and rural regions
From small-scale manufacturing and textiles to tech-enabled startups and handicrafts, MSMEs represent India’s diversity, creativity, and growth ambition. They promote grassroots development, self-employment, and inclusive participation in economic activity.
Globally, this isn’t a new trend. China’s rapid economic rise in the early 2000s was significantly driven by its Township and Village Enterprises (TVEs) — MSME-like units supported by robust banking systems and policy alignment. These enterprises flourished due to:
- Easy and directed access to formal credit
- Strong local government support
- Infrastructure-rich industrial clusters
- High levels of formalisation and integration with value chains
China’s story illustrates a simple point: when small enterprises are supported by well-structured financial ecosystems, they become engines of large-scale transformation.
India’s MSMEs have similar potential — in fact, in terms of scale and diversity, they are unmatched. But what holds them back is not a lack of ambition, talent, or demand — it is a lack of timely, accessible, and adequate credit. Despite their importance, millions of Indian MSMEs continue to be locked out of the formal financial system, stuck in a loop of informality, underfunding, and limited scalability.
This is where the conversation must shift — from recognising the importance of MSMEs to resolving their biggest challenge: the credit gap. Because just as banks keep the economy moving, MSMEs keep it thriving at the grassroots. Strengthening both, and ensuring they work in tandem, is not just desirable — it’s essential for India’s future economic success.
The Msme Struggle: A Growth Engine Starved Of Fuel
Despite being at the heart of India’s economy, MSMEs continue to face persistent challenges that hold back their true potential. Whether it’s a long-standing business or a budding enterprise, certain issues remain widespread.
According to SIDBI, the most common challenges for both established and new MSMEs include high competition, low technology adoption, and limited access to skilled labour. But across the board, one problem stands above the rest — access to credit.
Credit is the fuel that powers business growth. Yet, a majority of MSMEs are running on empty.
SIDBI estimates that India’s total finance demand from MSMEs is ₹123 lakh crore, with ₹92 lakh crore specifically in debt. Out of this, only ₹64 lakh crore is considered addressable through formal sources, and even then, just ₹34 lakh crore is being met by banks and NBFCs. This leaves a massive ₹30 lakh crore credit gap, which translates to nearly 24% of total finance demand.
This gap isn’t uniform—it affects different segments differently:
- By size: Medium enterprises face a 29% credit shortfall, while micro and small units face 25% and 21% respectively.
- By business activity: The credit gap is highest in trading MSMEs (33%), followed by services (27%) and manufacturing (20%).
- By geography: Urban MSMEs face a 20% gap, but the rural gap rises to 32%.
- By gender: Male-led enterprises face a 20% gap, while female-led MSMEs struggle with a stark 35% shortfall.
These disparities show that the credit gap is not just large — it is also deeply uneven. And when the most dynamic part of the economy is unable to access the capital it needs, the consequences ripple through growth, employment, and innovation.
Why Does This Gap Exist?
Despite various government and institutional efforts, a significant number of MSMEs still find themselves outside the formal credit net. The reasons behind this persistent credit gap are both structural and procedural:
1. Limited Financial History
Many MSMEs operate informally — without proper books of accounts, audited statements, or credit scores. As a result, they struggle to build the financial track record that lenders look for.
- SIDBI data: 14% of MSMEs cite limited credit history as a key barrier to accessing
2. High Perceived Risk
Banks and financial institutions often consider MSMEs — especially first-time or micro enterprises — as high-risk borrowers due to inconsistent revenues and informal operations.
- 22% of MSMEs report that high interest rates, often linked to their perceived risk profile, discourage them from taking loans.
3. Collateral Constraints
Most small businesses lack land, property, or other physical assets to pledge as collateral — a common prerequisite for formal loans.
- 13% of MSMEs are denied credit due to stringent collateral
4. Cumbersome and Complex Loan Processes
MSMEs frequently face long approval cycles, excessive documentation, and unclear procedures, leading many to drop out mid-way or avoid applying altogether.
- 11% report complex loan processes
- 9%–6% mention high document requirements and delays in disbursement
5. Poor Access and Low Awareness
In many semi-urban and rural areas, physical access to banks and NBFCs is limited. At the same time, awareness about loan schemes or digital credit products remains low.
- 14% cite lack of banks or financial institutions nearby
- Anecdotal studies also show a significant knowledge gap, especially among first- time borrowers
This mismatch between demand and accessible supply isn’t due to a lack of need — it’s due to a system that’s still not built around the realities of small businesses.
Bridging this gap is not just about capital — it’s about trust, technology, and transformation.
The good news? Every challenge discussed above has a solution—and it starts with data.
You don’t need massive datasets, expensive software, or a team of analysts to begin. Even basic information—like your weekly sales numbers, customer feedback, or staff working hours—can reveal patterns that help you make smarter decisions. In fact, the shift doesn’t have to be overwhelming. Many small businesses begin with just one area, and gradually see results that inspire broader adoption.
Consequences Of The Credit Gap
The persistent credit gap doesn’t just affect individual businesses—it has broader consequences for the economy:
- Underutilized Potential: Many MSMEs could expand operations, hire more employees, increase exports, and invest in innovation—but they remain constrained by lack of funds.
- Business Stagnation: Without growth capital, MSMEs struggle to scale beyond a certain point. Their expansion plans stall, limiting overall productivity gains and
- Dependence on Informal Finance: A significant number of MSMEs turn to unregulated lenders charging annual interest rates of 24–36%. This high cost of borrowing creates a cycle of debt and vulnerability
- Missed Macroeconomic Growth: When small businesses—even with huge collective potential—don’t get funded, the economy slows. According to SBI estimates, only 16% of overall bank credit is directed to MSMEs, despite their crucial role in GDP and employment . This limits broader economic
By remaining underfunded, MSMEs not only limit their own progress but also hold back India’s economic engine. The credit gap thus becomes a bottleneck at both micro and macro levels.
Ridging The Credit Gap: What Can Be Done?
To close the ₹30 lakh crore credit gap and unlock MSMEs’ full potential, India needs a multi-pronged approach involving policy, technology, and private sector innovation:
1. Digitise and Simplify Loan Processes:
- Automate loan applications and approvals, especially for loans under ₹10
- Use India’s Digital Public Infrastructure (GST, Aadhaar, bank APIs) to fast-track verification and reduce paperwork.
2. Leverage Alternative Data for Credit Scoring:
- Promote the use of transaction history, utility bills, and platform activity (e.g., Amazon sellers, UPI transactions) to evaluate creditworthiness, especially for first- time borrowers.
- Example: Fintechs like Lendingkart and Indifi use GST data and digital payment trails to offer loans to MSMEs without traditional credit scores.
3. Expand Reach Through Fintechs and NBFCs:
- Encourage partnerships between traditional banks and MSME-focused fintechs and NBFCs.
- Use embedded finance models to offer loans directly via e-commerce, POS, or ERP
4. Strengthen Credit Guarantee Schemes:
- Broaden the CGTMSE coverage, especially for micro and women-led
- Introduce sector-specific risk-sharing models for volatile industries like textiles or food processing.
5. Promote Formalisation and Financial Literacy:
- Increase awareness on benefits of formal registration (via Udyam) and maintaining digital records.
- Run targeted literacy programs on credit-building, digital tools, and loan
6. Gender- and Region-Specific Credit Programs:
- Develop low-collateral products for rural and women
- Incentivise lenders to serve underbanked geographies with performance-linked
7. Use Account Aggregator (AA) Framework:
- Promote adoption of the AA ecosystem to let MSMEs securely share their financial data (like bank statements, tax filings, cash flows) with lenders, improving trust and speeding up loan decisions.
Example: Just like Aadhaar and PAN now enable instant verification of identity and financial details for loan approvals, the AA framework allows MSMEs to digitally share verified financial records — reducing paperwork, fraud risk, and approval time.
Government And Institutional Efforts
Recognising the credit bottleneck faced by MSMEs, the government and key institutions have rolled out a series of initiatives to ease access to finance and formalise the sector:
MUDRA Scheme (Micro Units Development & Refinance Agency):
- Over ₹10 lakh crore has been disbursed under the Pradhan Mantri MUDRA Yojana (PMMY) since its launch.
- However, most loans are micro in nature (below ₹50,000), offering limited support for scaling businesses.
CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprises):
- Provides credit guarantees to banks and NBFCs, reducing the risk associated with lending to small and new businesses.
- Enables collateral-free loans of up to ₹2
Udyam Portal:
- Over 6 crore MSMEs have registered on the portal as of
- It enables formal recognition, easing access to credit, subsidies, and government
India’s Digital Public Infrastructure (DPI):
- Tools like GST, Aadhaar, and bank APIs are helping lenders assess borrower credibility with real-time data.
- This builds trust and supports more data-driven lending
SIDBI’s Proactive Role:
- SIDBI is actively mapping MSME credit demand, especially in under-served
It is also channeling funds to MSME-focused NBFCs, offering support through refinance schemes and launching targeted credit products.
The Role Of Fintechs And NBFCs
In recent years, fintechs and NBFCs have stepped in to bridge the last-mile credit gap where traditional banks hesitate.
- Fintechs are using cutting-edge tools like AI and machine learning to assess creditworthiness using alternative data — such as transaction histories, utility payments, and digital footprints.
- Models like invoice-based lending, embedded finance, and UPI-driven loan products are making credit more accessible, especially for digitally active
- NBFCs (Non-Banking Financial Companies), meanwhile, have deep rural reach and flexible underwriting norms — helping cater to businesses that banks often consider too risky.
Some notable players reshaping MSME credit delivery include Lendingkart, Indifi, Aye Finance, and RazorpayX, each offering faster approvals, minimal paperwork, and tailored products.
Conclusion: Fuelling India’s Future
India cannot aspire to become a $5 trillion economy if its 6.3 crore+ MSMEs continue to struggle for credit.
Solving this financing challenge isn’t just about empowering small businesses — it’s about unlocking the next wave of jobs, exports, and innovation.
With the right mix of policy, technology, and partnerships, we can bridge the ₹30 lakh crore credit gap and set the stage for inclusive, resilient, and long-term economic growth.
Common Challenges And Practical Solutions
a. Lack of Time:
Start by tracking one key metric daily; even 5 minutes of regular effort can create meaningful insights over time.
b. Limited Technical Knowledge:
Most tools like Excel, WhatsApp Business, or Vyapar are user-friendly and require no advanced technical skills to operate.
c. Uncertainty About What to Track:
Focus on the problem area—sales, inventory, or customers—and begin with 2–3 simple, relevant data points.
d. Inconsistency in Tracking:
Setting a fixed time each day or week ensures habit formation and prevents backlog or data gaps.
e. Data Without Interpretation:
Ask basic business questions (e.g., best-selling item, busiest day) to translate raw data into actionable decisions.
Conclusion: Data Is Your Silent Business Partner
In today’s competitive market, small businesses don’t need massive resources to grow— they need smarter decisions. And smart decisions come from listening to your data.
Whether it’s understanding your customers, managing stock better, or improving team productivity, small and consistent data use can lead to big, sustainable results.
You don’t need to be perfect or tech-savvy. You just need to start small, stay consistent,
and act on what you learn.
Key Takeaways
a. Start with a problem, not the tool. Let your biggest pain point guide what data to track.
b. Use what you already have. Tools like Excel, WhatsApp, and Vyapar are simple and effective.
c. Keep it consistent. A few minutes of tracking every day is more powerful than perfect monthly reports.
d. Act on patterns. Use data not just to store information, but to make real business decisions.
e. Small data, big results. Even the smallest insights—when used well—can help you grow efficiently.
-Harshada & Kritika
