Unsecured MSME Lending Isn’t Flawed – It’s Unfinished: A Blueprint For Moving From Collateral To Cash Flow

If one looks only at India’s growing mutual fund industry, the financial narrative appears strong. Monthly SIP flows have crossed Rs 25,000 crore, showing retail-led capital formation at scale. In the parallel space of unsecured lending to micro, small and medium enterprises, the picture is more complex and cautionary.

Recent liquidity challenges across the sector point to a central truth:

The future of unsecured MSME lending will belong not to the boldest, but to the most calibrated.

Unsecured lending rests on a clear mission: lending to potential rather than property. India’s MSMEs do not have sufficient tangible collateral to meet their credit needs. Insisting on collateral restricts entrepreneurship. Conviction without discipline, however, is not a strategy; it is fragility.

The lesson is direct. Unsecured lending does not fail because it lacks collateral. It fails because it lacks calibration. The breakdown often sits not in loan structures, but in the thinking behind them.

From my experience across lending portfolios, unsecured credit stress usually stems from three fault lines:

1. Weak Underwriting Frameworks

Over-reliance on bureau scores and static financials misses the true position of a small business—its cash flows. Underwriting models must expand to include real-time, behavioural and transactional signals.

2. Passive Portfolio Monitoring

In many cases, the lender-client relationship ends at disbursement. Risk builds when lenders skip regular check-ins that could flag early warning signs—falling sales, rising inventories or tighter working capital.

A missed conversation today becomes a missed payment tomorrow.

3. Concentrated Liability Structures

Dependence on a single lender type or short-term borrowing cycles increases liquidity risk. When markets tighten, access shuts off when it is needed most.

The conclusion is clear:

Unsecured lending is not flawed—it is unfinished.

To complete this shift and build resilient models, NBFCs and FinTechs must focus on a four-part blueprint:

1. Secure Cash Flows, Not Just Assets

Move from static collateral assessment to dynamic, cash flow-based underwriting. India’s Account Aggregator framework and data analytics enable this shift.

2. Diversify Liabilities to Withstand Volatility

Raise funds from a mix of sources—domestic banks, capital markets and offshore lines—to build balance sheets that absorb shocks.

3. Embed Risk Intelligence End to End

Risk should not remain limited to back-office teams. From onboarding to collections, each unit must operate with risk awareness.

4. Treat Regulatory Recalibration as a Catalyst, Not a Constraint

Whether it is SEBI’s TER caps for mutual funds or the RBI’s scrutiny of unsecured lending, tighter regulation signals sector evolution. Lenders that adapt will use it to innovate.

Unsecured lending does not need less risk. It needs wiser risk.

The blueprint is defined. The question for leaders in the lending space is which part of this evolution they will address first.

As capital markets deepened through retail trust, MSME credit must expand through discipline and measured risk-taking. The choice is not between conviction and caution. It is between blind optimism and informed resilience.

This is a moment for the sector to align vision with viability and to build institutions that support India’s path to a $5 trillion economy and beyond.