As India approaches the Union Budget on February 1, the conversation around economic growth is once again turning to MSMEs. And rightly so.
The MSMEs contribute over 30% to India's GDP, employ more than 100 million people, and form the backbone of domestic supply chains, exports, and entrepreneurship across towns and districts.
Over the past few years, MSMEs have shown remarkable resilience through global shocks, supply-chain disruptions, and tightening financial conditions. Yet, despite their central role in the economy, access to timely and affordable credit remains a persistent challenge. The issue is no longer about whether credit flows to MSMEs, but whether it flows in a manner that is sustainable, predictable, and aligned with their business realities.
This Budget presents an opportunity to move the MSME credit conversation from short-term liquidity support to long-term credit longevity.
Shifting MSME Lending from Collateral to Cash Flows
One of the structural constraints in MSME financing has been the over dependence on collateral. This excludes a large segment of viable enterprises that may be profitable and growing but lack traditional asset backing. India is uniquely positioned to address this challenge through its digital public infrastructure.
With GST data, account aggregators, e-invoicing, and OCEN frameworks now maturing, lenders can increasingly assess MSMEs based on cash flows, business behaviour, and sector specific dynamics. The Budget can accelerate this shift by encouraging co-lending models that combine the low-cost capital of banks with the underwriting expertise and last-mile reach of specialised NBFCs. Such collaboration enables scale while preserving credit quality and financial stability.
Creating a Stable Funding Backbone for MSME Focused NBFCs
MSME-focused NBFCs play a critical role in reaching underserved enterprises but remain structurally reliant on market borrowings. During periods of liquidity tightening, even well-performing portfolios face funding pressures. This makes the case for a more predictable and countercyclical funding architecture.
A key industry recommendation is the creation of a dedicated NBFC MSME or NBFC Priority Sector category, recognising institutions with a predominantly MSME loan book. In parallel, the establishment of a structured refinance window, potentially anchored through SIDBI, can provide longer tenor and lower cost funding. Such a mechanism would allow MSME lenders to continue supporting viable enterprises through economic cycles rather than pulling back during periods of stress.
Strengthening Credit Guarantees and Recovery Confidence
Credit guarantees remain a powerful tool for improving lender confidence and expanding MSME credit responsibly. There is scope to broaden partial credit guarantee schemes, especially for small ticket and short tenure loans across manufacturing, services, and trade segments that remain under penetrated.
Equally important is strengthening recovery frameworks. Rationalising SARFAESI thresholds for NBFCs, improving digital recovery processes, and ensuring regulatory parity across lenders can materially reduce risk perception and borrowing costs over time. A strong recovery ecosystem ultimately enables lenders to lend with greater confidence.
Aligning Policy with the Realities of MSMEs Improving
MSME credit is not about maximising disbursement numbers. It is about improving the quality and resilience of lending. Revisiting Priority Sector Lending norms to reflect current MSME structures,offering targeted tax or TDS relief on PSL loans, and continuing efforts to ensure timely payments to MSMEs can address stress at its root.
Encouraging sector-specific underwriting and cash flow aligned repayment structures will help reduce NPAs structurally rather than cyclically. This alignment between policy, lender incentives, and MSME realities is essential for sustainable credit expansion.
From Expanding Credit to Building Lasting Credit Confidence
The true success of MSME policy will not be measured by how much credit is disbursed in a single year, but by how predictable, affordable, and resilient that credit remains over time. A Budget that focuses on funding stability, efficient risk sharing, and regulatory alignment can transform MSME credit from a periodic intervention into a permanent growth enabler.
Such an approach will protect jobs, strengthen local supply chains, and reinforce India's economic resilience. Most importantly, it will ensure that MSMEs are empowered not just to withstand uncertainty, but to lead India's growth journey in the years ahead.
Shachindra Nath, founder and managing director at Ugro Capital.
Disclaimer: The views expressed in this article are solely those of the author and do not necessarily reflect the opinion of NDTV Profit or its affiliates. Readers are advised to conduct their own research or consult a qualified professional before making any investment or business decisions. NDTV Profit does not guarantee the accuracy, completeness, or reliability of the information presented in this article.
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