Introduction
Credit plays a pivotal role in the lifecycle of a small business. From securing initial funding to expanding operations, effective credit management can determine a business’s success and sustainability. India, the world’s fourth-largest economy, has emerged as the fastest-growing major economy and is on the track to become the world’s third-largest economy with a projected GDP of $7.3 trillion by 2030.Small businesses form the backbone of the Indian economy. According to the Ministry of MSME, India has over 67 million Micro, Small, and Medium Enterprises (MSMEs), contributing nearly 30% to the GDP and 45% of exports, while employing more than 110 million people. Despite their importance, one of the biggest challenges faced by these enterprises is access to timely and affordable credit.
How Credit enables MSME growth
- Bridging the funding gap – Many MSMEs in India operate on thin margins and rely on credit to manage working capital.Credit helps bridge the gap between receivables and payables, especially since delayed payments are a common issue in Indian supply chains. Despite their large numbers, a significant portion of MSMEs operate informally and lack access to formal credit channels.
- Driving investment and modernization – With access to credit, MSMEs can invest in machinery upgrades, new technology, and infrastructure improvements. They can procure efficient machines and tools to enhance their productivity and maintain standardization. With the help of credit they can expand their business and tap into new markets and diversify their operations.
- Employment Generation & Livelihood Support – MSMEs are the largest source of non-agricultural employment in India, especially for semi-skilled and unskilled workers, fostering inclusive growth in rural and urban areas. Loans provide the necessary capital to start a business, create jobs, and foster a more inclusive economic landscape.
- Boosting Exports & Foreign Exchange Earnings – MSMEs are pivotal in global trade, with their unique products catering to niche international markets, especially in textiles, leather, and engineering goods. Access to credit enhances their ability to compete globally and boosts India’s export revenue.
- Building a strong credit profile – MSMEs benefit from having a good CIBIL score (credit score). A healthy repayment history can secure better loan terms, lower interest rates, and higher loan amounts from institutional lenders.
- Driving Digital & Technological Transformation – With increased adoption of digital payments, automation, and AI-driven solutions, MSMEs are transitioning into tech-driven enterprises. Credit plays an important role in this transition as demand for digital infra also rises with this transformation.
- Formalizing the business ecosystem – To access formal credit, MSMEs are encouraged to formalize their operations by registering on platforms like the Udyam Portal and maintaining proper financial records. This transition improves transparency, builds credibility with lenders, and makes them eligible for various government incentives
Challenges for MSMEs in accessing credit
As per CRISIL estimates, only 20% of the country’s MSMEs have access to formal credit. The recent increase in CGTMSE(Credit Guarantee Fund Trust for Micro and Small Enterprises) guarantees has helped, but only 2.5 crore out of 6.3 crore MSMEs have availed formal credit, highlighting a major gap.
The main reasons for this challenge are –
- Lack of collateral: Many MSMEs do not have sufficient tangible assets to pledge as security for loans, which deters traditional lenders.
- Lack of Awareness & Utilization of Government Schemes: Despite multiple government schemes, many MSMEs fail to take advantage due to low awareness and bureaucratic hurdles. Complex application processes and lack of proper guidance deter small businesses from availing benefits.As of Nov 2024, ₹2.57 lakh crore was sanctioned under Mudra Yojana, but many eligible businesses remain outside the credit net.
- Information asymmetry: Lenders often face difficulty in assessing the creditworthiness of MSMEs due to insufficient financial documentation and a lack of proper accounting practices.
- Low financial literacy: Many MSME owners lack the financial knowledge needed to manage their cash flow, negotiate loan terms, and access available schemes effectively.
Government and regulatory initiatives
- Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE): This scheme provides collateral-free credit facilities to micro and small enterprises, offering a guarantee to lenders for up to 85% of the loan amount. The credit guarantee cover for micro and small enterprises has been increased from ₹5 crore to ₹10 crore, enabling additional credit of ₹1.5 lakh crore over five years
- Udyam portal: It helps in simplifying the process of registration for MSMEs. A new customised Credit Card scheme will provide ₹5 lakh in credit to micro enterprises registered on the Udyam portal, with 10 lakh cards set to be issued in the first year.
- Support for Startups and First-Time Entrepreneurs: In Budget 2025-26, a new Fund of Funds with ₹10,000 crore will be established to expand support for startups.A scheme for 5 lakh first-time women, Scheduled Caste, and Scheduled Tribe entrepreneurs will provide term loans up to ₹2 crore over five years, incorporating lessons from the Stand-Up India scheme.
- Pradhan Mantri Mudra Yojana (PMMY): The scheme facilitates micro credit/Loan up to Rs. 20 lakhs to MSMEs
- PSB Loans in 59 Minutes portal: This online platform facilitates the quick approval of in-principle loans ranging from ₹1 lakh to ₹5 crore for MSMEs.
- Trade Receivables e-Discounting System (TReDS): This digital platform helps MSMEs address delayed payments by providing a mechanism for discounting invoices, thereby improving their cash flow.
The way forward
- Promoting financial literacy – Awareness campaigns and training programs are crucial so entrepreneurs understand loan products, interest rates, and repayment structures.
- Customized Loan Products – Tailored products for particular sectors like agriculture, manufacturing and export-oriented industries
- Promotion of Digital lending – Its ease of usage and online process make it attractive for MSMEs with a time-saving process.
For India’s vision of becoming the world’s third-largest economy, empowering small businesses through credit is essential. Access to affordable, timely, and transparent credit not only supports business survival but also drives innovation, job creation, and inclusive growth. Timely and affordable credit is crucial for helping them bridge liquidity gaps, invest in technology, and compete in domestic and global markets.
In our context, credit is not just financial assistance — it is a strategic enabler of economic transformation
