Financial inclusion for MSMEs: MSMEs have long been the backbone of India’s growth and continue to be at the centre of the government’s aspirations of a Viksit Bharat. According to the official data, there are over 6.33 crore unincorporated MSMEs in India and nearly 6 crore enterprises with Udyam registration under the MSME Ministry. The drive to formalise informal units in the country through the Udyam initiative aims to enable faster and cheaper access to formal credit. 

While the credit flow by scheduled commercial banks to MSMEs has grown by 20.6 per cent to Rs 27.25 lakh crore in FY24 from Rs 22.60 lakh crore in FY23, there’s still a significant number of enterprises for whom credit access is a major challenge. For them, informal sources of funding such as money lenders are largely the go-to option for external credit. 

The primary concern faced by MSME borrowers in raising credit from a bank is lack of collateral as many of them are small and micro in size and hence don’t have enough tangible assets that can be pledged as collateral in exchange for a business loan. Moreover, with stringent and extensive document requirements including financial statements, tax filing, and other business records, these units struggle to raise formal credit. 

Further, poor credit history or no credit history and high interest rates and processing fee restricts MSMEs’ access to credit. Delayed payments from buyers of MSME goods and perceived high risk linked with MSME lending by banks are other reasons for the credit gap in the MSME sector. 

However, to resolve credit-related challenges faced by MSMEs, the Reserve Bank of India (RBI) and the government have been running several initiatives such as Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), Mudra loans, 59-minute loan approval scheme, and TReDS and more. 

To enable more enterprises to benefit from these schemes, the MSME Ministry in this year’s budget had expanded the MSME definition to include enterprises with turnover up to Rs 500 crore under the MSME ambit instead of the current Rs 250 crore.  

Moreover, the credit guarantee cover under the CGTMSE scheme was also increased from Rs 5 crore to Rs 10 crore leading to an additional credit of Rs 1.5 lakh crore in the next five years. 

Alok Mittal, Co-founder and MD at Indifi Technologies said the announcements are a decisive step in strengthening MSMEs by expanding credit access and reducing financial barriers—both critical for their growth and sustainability.  

“The enhanced credit guarantee cover and customized credit cards via the Udyam Portal will inject much-needed liquidity, enabling small businesses to access timely and affordable financing. The increased investment and turnover limits, coupled with targeted support for first-time women entrepreneurs, will boost business expansion and enhance the sector’s resilience,” said Mittal 

Sensing the lending opportunity in the MSME market, a number of alternative lending platforms have come up to disburse credit based on the company’s cash flows instead of asset-based lending. 

These include fintech lenders such as Aye Finance, Indifi, Faircent, CredAble and more while invoice discounting platforms such as M1xchange, Invoicemart, and RXIL allow MSMEs with short-term working capital by selling unpaid invoices at a discount. 

These digital platforms use AI and machine learning for faster processing of loan applications with minimal documentation such as GST records, bank statements, and transaction history to assess creditworthiness. Moreover, the repayment options are also customised for borrowers based on the latter’s revenue cycle. 

Coupled with such platforms, government measures and policy initiatives have supported MSMEs with their credit needs to a decent extent, but gaps remain. Going ahead, a collaborative approach involving the government and policymakers, digital lenders or fintech firms, and traditional banks will be critical to bridge the credit gap in the MSME sector and enable sustainable growth.