Micro, Small and Medium Enterprises (MSMEs) remain the backbone of India’s economy, contributing nearly one-third of the country’s GDP and employing over 11 crore people. They also play a crucial role in exports, innovation, and entrepreneurship, enhancing India’s global competitiveness. With continuous policy support and digital transformation, the MSME sector continues to be a major driver of inclusive and sustainable growth.

The MSME Credit Challenge

Despite their economic significance, MSMEs continue to face challenges in accessing timely and adequate formal finance. Key constraints include incomplete financial documentation, limited credit history, and lack of collateral; all of which have contributed to a persistent credit gap. Bridging this gap requires a multi-pronged approach combining better credit guarantee mechanisms, alternative credit assessment tools, and greater financial literacy.

A study conducted by SIDBI in May 2025 estimated the sector’s total financing needs at ₹123 lakh crore, of which ₹92 lakh crore represents debt. Around 70% of this demand (₹64 lakh crore) is considered addressable, but formal debt supply from banks and NBFCs currently stands at only ₹34 lakh crore — leaving an addressable credit gap of nearly ₹30 lakh crore.

Evolving Credit Landscape: Banks and NBFCs

According to State Bank of India’s June 2025 report, private banks’ credit growth slowed to 9.5%, its lowest since FY21, while public sector banks recorded 12.2% growth in FY25. The share of incremental credit by PSBs rose sharply from 20% in FY18 to 56.9% in FY25. Meanwhile, gross non-performing assets (NPAs) in the banking sector fell to record lows in H1FY25, reflecting stronger asset quality.

NBFCs, however, continue to play an increasingly pivotal role. With expected growth of around 20% in FY26, NBFCs are projected to surpass both public and private sector banks in MSME lending. Their agility, sectoral understanding, and innovative credit products have made them essential partners in extending financial access to smaller enterprises, particularly those outside the formal banking network.

Digitisation: Accelerating Credit Inclusion

Digitisation is rapidly transforming MSME financing. Banks, NBFCs, and fintech platforms are strengthening digital infrastructure and promoting digital literacy to improve access. As seen in the widespread adoption of UPI, digital channels are expected to make lending faster, simpler, and more transparent.

State Bank of India’s initiatives such as MSME Sahaj and SME Digital Business Loans are examples of this transformation. These platforms enable end-to-end digital loan processing, cutting turnaround times to as little as 45 minutes for loans up to ₹50 lakh. Leveraging data-driven algorithms and digital footprints;  including GST filings and bank transaction data ; SBI and other lenders are shifting toward cash-flow-based lending, reducing reliance on collateral.

For loans up to ₹5 crore, this approach is supported by guarantee schemes such as the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), enhancing lenders’ confidence while broadening access for smaller businesses.

A Boston Consulting Group study found that digital processing has reduced loan turnaround times by nearly 70% and improved approval rates by about 30%. The RBI’s Account Aggregator (AA) framework has further streamlined secure, consent-based data sharing; strengthening trust and interoperability in the financial ecosystem.

Policy Reforms: Strengthening Credit Flow

Regulatory measures are also evolving to make MSME financing more flexible and borrower-friendly. From January 1, 2026, the Reserve Bank of India will prohibit foreclosure fees on all floating-rate loans to individuals and MSMEs for business purposes. Borrowers will also be able to switch from floating to fixed-rate structures at each reset, while credit risk spreads may now be revised more frequently.

Additionally, working capital loans secured by gold are now available to a wider range of businesses beyond jewellers, offering new liquidity options for sectors using gold as a raw material. RBI continues to enforce priority sector lending (PSL) targets and classification norms to ensure steady credit flow to MSMEs, compelling banks to meet lending obligations or contribute to the MSE Refinance Fund.

NBFCs and the New Credit Ecosystem

NBFCs have emerged as key players in addressing last-mile credit delivery. They leverage technology for alternative credit scoring and rely on partnerships with fintech firms to expand their reach among unserved and underserved MSMEs. As competition intensifies, NBFCs are likely to diversify into newer segments such as green MSME finance, supply-chain financing, and embedded credit products.

Their ability to combine local market insights with digital capabilities positions them uniquely in India’s evolving financial architecture — especially in reaching Tier-2 and Tier-3 towns where traditional banks have limited penetration.

The Road Ahead

Digitisation, credit guarantees, and NBFC-led innovation are converging to close the MSME credit gap. Supported by progressive RBI policies and data-driven lending, the future of MSME financing in India is set to become faster, more inclusive, and more attuned to real business needs.

As India’s MSME ecosystem evolves into a more technology-enabled and credit-resilient sector, the next decade will likely witness a shift from collateral-based lending to cash-flow-based credit models; unlocking new growth opportunities and strengthening the foundation of India’s enterprise economy.