As India prepares for its 2025 Budget, all eyes are on the government’s approach to addressing the credit gap faced by the country’s Micro, Small, and Medium Enterprises (MSMEs), which have long been an Achilles heel for India Inc. The sector, which accounts for a significant portion of employment and contributes around 30% to India’s GDP, continues to struggle with limited access to formal credit. As the government gears up to present its fiscal blueprint, the challenge of bridging this credit gap has become more pressing than ever.
For years, MSMEs have been recognized as the backbone of India’s economy, yet they remain highly underserved by the formal financial system. According to estimates, the credit gap for MSMEs in India stands at a staggering ₹20-25 lakh crore, a number that has only continued to grow despite several initiatives aimed at alleviating the issue. While the government has rolled out programs such as the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) and initiatives like the MUDRA scheme, the sector remains heavily reliant on informal sources of credit, which are often costly and come with unfavorable terms.
The lack of adequate financing for MSMEs is a barrier to their growth and limits their ability to scale, innovate, and contribute to the broader economy. As smaller businesses struggle with rising raw material costs, supply chain disruptions, and labor challenges, the inability to access affordable credit puts them at a competitive disadvantage, often leaving them unable to invest in necessary expansion or technology upgrades.
One of the key factors contributing to the credit gap is the perceived risk associated with lending to MSMEs. Financial institutions, particularly banks, have often been hesitant to extend credit to this sector due to concerns about the high default rate, inadequate collateral, and lack of financial transparency. While MSMEs are crucial for job creation and economic development, their relatively small size and fragmented nature make them difficult for banks to assess, leading to an inherent risk-aversion.
The impact of this credit gap has been particularly stark in the wake of the COVID-19 pandemic, which further strained the financial health of many MSMEs. Despite government initiatives, including the Emergency Credit Line Guarantee Scheme (ECLGS), many businesses have continued to face difficulties in securing adequate funding. As the economy begins to recover, it is imperative that the government takes bolder steps to address the structural weaknesses in the MSME financing ecosystem.
Industry leaders and business associations have repeatedly called on the government to take more decisive action in the Budget to address the credit issue. There is growing consensus that the country needs a comprehensive reform package that not only increases the flow of credit to MSMEs but also ensures that these businesses have access to affordable and flexible financing options.
MSMEs are the lifeblood of India’s economy, but they continue to be held back by an ever-expanding credit gap, said Sanjay Agarwal, the CEO of a leading industry association. We need targeted measures in the Budget that address the root causes of this issue and provide a more conducive environment for MSMEs to thrive. A focused approach on enhancing access to credit, reducing interest rates, and improving financial literacy among MSME owners will go a long way in driving growth and employment.
One key solution being proposed is the creation of a dedicated MSME financing body that could serve as an intermediary between small businesses and financial institutions. This body could act as a guarantor, helping to mitigate risks for banks and lending institutions. By providing a more structured and transparent platform for MSME financing, such an entity could significantly reduce the barriers faced by these businesses.
Another area where reforms are needed is in the digitalization of MSME lending. With advancements in technology, digital lending platforms have emerged as a potential game-changer for small businesses. However, these platforms must be supported with robust regulatory frameworks and safeguards to ensure that they operate transparently and responsibly. Additionally, increasing financial inclusion through digital tools, such as mobile banking and alternative credit scoring models, could help bring underserved MSMEs into the formal lending system.
The government could also consider introducing tax incentives or subsidies for financial institutions that lend to MSMEs, effectively lowering the cost of credit for these businesses. In tandem with this, there should be a focus on enhancing the creditworthiness of MSMEs, possibly through the development of a centralized credit information platform that provides banks and lending institutions with better access to the financial history of businesses.
The impact of addressing the MSME credit gap could be transformative for India’s economy. By empowering small businesses with the financial resources they need to grow, the government could unlock a significant source of innovation, job creation, and economic activity. The MSME sector has the potential to drive India’s transition into a high-growth economy, but that potential can only be realized if it is provided with the right financial tools and support.
As the 2025 Budget draws closer, all eyes will be on Finance Minister Nirmala Sitharaman’s proposals for MSME development. With the sector facing unprecedented challenges, it is crucial that the government prioritizes measures to bridge the credit gap and enable MSMEs to realize their full potential. Addressing this issue will not only strengthen India Inc. but also play a key role in ensuring inclusive economic growth and long-term prosperity for the country.
