MSME Financing in India:

Driving Inclusive Growth and

Economic Resilience
Ramesh Srivatsava Arunachalam

5.1. INTRODUCTION
Micro, Small, and Medium Enterprises (MSMEs)
chapter provides an in-depth analysis of MSME
financing in India, exploring the current financial
environment, challenges, and opportunities
5
are vital to India’s economy, acting as key drivers for improvement. It also examines the sector’s
of entrepreneurship, employment, and economic evolution and future outlook, including the effects
development. They contribute significantly to both of policy reforms, technological advancements, and
domestic and international markets, forming the government initiatives that are reshaping MSME
backbone of the country’s economic structure. This financing.

RBI, IRDAI, PFRDA and SEBI

MSME Lenders and Credit Bureaus (EQUIFAX,

Refinance Institutions Government
HIGHMARK, EXPERIAN
of India
and CIBIL)
Public Sector Private Sector Foreign Banks Small Finance
Banks (PSBs) Banks (PVBs) (FBs) Banks (SFBs)
Ministry of MSME
Medium
Non-Banking Financial Microfinance Enterprises
FinTechs Udyam
Companies (NBFCs) Institutions (MFIs)
Small Registration
Enterprises
National Bank for Small Industries Micro Units
Agriculture and Development & Micro Credit Guarantee
Development Bank Enterprises Fund Trust for
Rural Development of India (SIDBI) Refinance; Agency
(NABARD) Ltd (MUDRA) Micro and Small
Enterprises
MSME Loan (CGTMSE)
Trade Receivables Discounting System (TReDS) Jocata Sumpoorn Product Mix

Term Pradhan Mantri Bank Point Bill Discounting Asset- Business Loans Line of Credit/
Loans MUDRA Yojana Guarantee of Sale or Invoice Backed specifically Overdraft
(PMMY) Finance Discounting Loans targeting Women Facility
Entrepreneurs

Reserve Bank of India (RBI), Insurance Regulatory and Development Authority of India (IRDAI), Pension Fund Regulatory and Development
Authority (PFRDA) and Securities and Exchange Board of India (SEBI)

Figure 5.1. Strategic Context of MSMEs Ecosystem SME Financing – Stakeholder DiagramPercentage Share
2 INCLUSIVE FINANCE INDIA REPORT 2023

As of November 9, 2024, MSMEs employ 5.2. INDIAN MSME SECTOR CREDIT

approximately 22.94 million people across India, GAP
making them the second-largest employment
provider after agriculture. MSMEs help address Figure 5.2 illustrates the substantial credit gap within
unemployment, especially through labour-intensive India’s MSME sector, as detailed in the NITI Aayog’s
industries, and contribute around 30% to India’s November 2023 report.i This gap underscores the
GDP and about 45% to nation’s exports. By boosting severe shortfall between MSME credit demand and
production, consumption, and investment, MSMEs supply, reflecting an ongoing financial constraint
are foundational to India's economic growth. that limits the sector’s growth potential. The figure
According to data from the Udyam Registration highlights the scale of unmet financing needs in
portal and Udyam Assist Platform (UAP), there are billions of rupees, emphasising the urgent need for
5,44,64,385 registered MSMEs as of November 9, targeted financial interventions to bridge this gap.
2024. Micro-enterprises dominate, with 5,36,13,075 Addressing this deficit is crucial to enabling MSMEs
registrations (98.44%), while small enterprises to scale their operations, enhance productivity, and
account for 1.33% (7,26,169), and medium contribute more effectively to India’s economic
enterprises make up 0.13% (68,576). Together, growth and job creation goals.
these registered MSMEs employ over 22.94 million Similar estimates were reported by the
people. Of these, 3,07,65,201 MSMEs are registered Parliamentary Standing Committee on Finance—
under Udyam, providing employment to over 20.12 chaired by Jayant Sinha—in its April 8, 2022 report,
million individuals. The UAP, on the other hand, Strengthening Credit Flows to the MSME Sector. The
has formalised an additional 2,36,99,184 micro- Committee estimated the credit gap at ₹20-25 lakh
enterprises, benefiting 2.81 million individuals and
crore (₹20,000-25,000 billion), further underscoring
extending the reach of formal MSME registration.
the need for enhanced financial support to unlock
The entire MSME ecosystem in India is
the full potential of India’s MSME sector.ii
diagrammed in Figure 5.1.

45,000

40,000

35,000

30,000
( J in billion)

25,000

20,000

15,000

10,000

5,000

0
2009-10 2017-18 2018-19 2019-20 2020-21
Total Addressable Credit demand by MSMEs 27,900 38,420 40,220 40,630 41,950
Total supply of credit flow to MSME sector 7,000 16,980 18,580 18,970 20,210
Credit Gap 20,900 21,440 21,640 21,660 21,740

Figure 5.2. Credit Gap in MSME Sector (₹ in billion)

Source: NITI Aayog, (November, 2023), ‘Impact Assessment of Pradhan Mantri Mudra Yojana (PMMY)’, https://www.niti.gov.in/
sites/default/files/2024-08/Assessment%20of%20PMMY_Final%20Report.pdf
 MSME Financing in India: Driving Inclusive Growth and Economic Resilience 3

Table 5.1. Credit Flow to the MSME Sector by SCBs (number of accounts in millions, the amount outstanding in ₹ billion)
Bank Groups Items 2018-19 2019-20 2020-21 2021-22 2022-23
Public Sector Banks (PSBs) No. of accounts 11.30 11.08 15.08 15.00 13.90
(1.76) (-1.90) (36.05) (-0.7) (-7.4)
Amount Outstanding 8,800.33 8,933.15 9,086.59 9,558.60 10,849.53
(1.79) (1.51) (1.72) (5.2) (13.5)
Private Sector Banks (PVBs) No. of accounts 20.53 27.06 26.68 11.30 7.30
(38.42) (31.81) (-1.41) (-57.7) (-35.2)
Amount Outstanding 5636.78 6469.88 7,920.42 9,698.44 10,898.33
(37.23) (14.78) (22.42) (22.4) (12.4)
Foreign Banks (FBs) No. of accounts 0.24 0.27 0.26 0.21 0.20
(9.14) (14.17) (-5.11) (-19.0) (-26.3)
Amount Outstanding 669.39 732.79 832.24 853.52 853.49
(36.94) (9.47) (13.57) (2.6) (0.0)
All Scheduled Commercial No. of accounts 32.07 38.42 42.02 26.50 21.30
Banks (SCBs) (22.61) (19.80) (9.37) (-37.0) (-19.4)
Amount Outstanding 15,106.51 16,135.82 17,839.25 20,110.57 22,601.35
(14.08) (6.81) (10.56) (12.7) (12.4)
Note: Figures in the parentheses indicate y-o-y growth rates.
Source: RBI, ‘Report on Trend and Progress of Banking in India 2022-23’.

5.3. CREDIT FLOW TO THE MSME larger loan amounts. This targeted approach led to
SECTOR FROM SCHEDULED a nearly 50% increase in outstanding loans over five
COMMERCIAL BANKS (SCBS) years, reflecting a sector-wide focus on financial
stability and efficient resource allocation.
From Table 5.1, it is clear that the Public Sector Furthermore, annual growth rates reveal the
Banks (PSBs) have shown consistent growth in SCBs’ adaptability to changing economic conditions.
outstanding MSME loans, rising from ₹8,800.33 PSBs maintained moderate, steady growth, while
billion in 2018‒19 to ₹10,849.53 billion in 2022– PVBs exhibited volatility, aligning their lending
23. This growth reflects a deliberate approach strategies to focus on quality over quantity. FBs took
of supporting financially stable MSMEs while a steady approach, prioritising client quality and
balancing risk, as evidenced by a decrease in the contributed to an inclusive financing environment
number of accounts but larger loan amounts per with an emphasis on stable MSMEs. Each category
account. Private Sector Banks (PVBs) initially of SCBs has adapted its MSME lending strategy to
experienced rapid expansion, peaking in the meet sector demands: PSBs increased existing loan
number of accounts in 2019–20. However, they lines, PVBs focused on high-quality clients, and FBs
later reduced the number of accounts significantly, retained a niche presence. Together, these banks have
shifting their focus to higher-value MSME loans. strengthened MSME financial inclusion, enabling
By 2022–23, the outstanding loan amounts grew resilience and creating employment opportunities.
by 12.4%, aligning with a targeted lending strategy Interestingly, the number of MSME accounts
aimed at more stable MSMEs. Foreign Banks (FBs) with SCBs peaked in 2020–21 but decreased
maintain a smaller but steady MSME credit portfolio, thereafter, with SCBs shifting focus to fewer, higher-
favouring a more selective approach. Although the value accounts. This approach likely reflects SCBs’
number of accounts declined over time, outstanding response to the impacts of the pandemic, tightening
loan amounts continued to grow, indicating a credit terms to mitigate risks in MSME portfolios.
focus on fewer, higher-quality clients with sound PSBs maintained a relatively stable MSME account
creditworthiness and international prospects. base, with minor fluctuations. This approach
Across all Scheduled Commercial Banks (SCBs), underscores their role in promoting financial
there has been substantial growth in MSME credit, inclusion while managing risks conservatively,
characterised by a shift towards fewer accounts but providing a stable credit flow even as private banks
4 INCLUSIVE FINANCE INDIA REPORT 2023

shifted their strategies. PVBs rapidly expanded portfolios with their profitability goals. Foreign
initially but subsequently reduced the number of Banks maintained minimal presence in MSME
accounts sharply, emphasising fewer, higher-value lending, concentrating on select, low-risk clients.
loans. This shift aligns with a strategic focus on This approach aligns with FBs’ risk management
minimising risk exposure while optimising returns practices, catering to financially stable MSMEs in
from established, resilient MSMEs. FBs have kept a need of specialised credit solutions. With PSBs
limited but consistent presence in MSME lending, capturing a larger share of MSME accounts, their
reducing the number of accounts while maintaining role in supporting financial stability and inclusion is
credit amounts. This strategy reflects a focus on further strengthened. This shift highlights PSBs as a
stable, high-quality clients, with FBs playing a key source of credit for MSMEs, particularly smaller
specialised role in MSME financing. The decrease in enterprises lacking access to private or foreign bank
MSME accounts, particularly within private banks, lending.
may limit access for newer MSMEs facing stricter A deeper analysis suggests that India’s MSME
credit criteria. However, PSBs, however, maintained financial landscape is evolving, shaped by the
stability, balancing the need for inclusive growth changing roles of PSBs, PVBs, and FBs. From FY
while managing financial risks. 2018–19 to FY 2022–23, data reveals a clear shift
Similarly, outstanding MSME credit across SCBs in the distribution of MSME credit among these
has steadily increased, rising from ₹15,106.51 billion banking segments. PSBs, which initially held the
in 2018–19 to ₹22,601.35 billion in 2022–23. This majority of MSME credit, experienced a gradual
growth underlines SCBs’ ongoing commitment to reduction in their share, ultimately converging
supporting the MSME sector, with credit expansion with and being overtaken by PVBs by FY 2022–
playing a crucial role in the recovery and resilience 23. This shift underscores an increasing focus by
of MSMEs post-pandemic. PSBs have consistently PVBs on MSME lending, driven by their strategic
increased MSME lending, contributing to economic emphasis on medium-sized enterprises and the
development even amidst market fluctuations. use of advanced risk assessment technologies.
With a strategic focus on financial inclusion, PSBs While PSBs continue to serve as the backbone for
have reinforced their role in providing dependable MSME credit, offering broader reach and accessible
credit to MSMEs. PVBs nearly doubled their MSME funding, PVBs have moved towards providing larger
credit portfolio over five years, emphasising rapid loans to fewer clients. This trend reflects not only
expansion. This growth reflects the private sector’s PVBs’ competitive drive but also their preference
strategy to capture the MSME market, fuelled by for clients with established credit histories and
advanced risk assessments and credit-scoring tools. sizable loan requirements. Meanwhile, FBs have
Foreign Banks expanded MSME credit modestly, maintained a smaller yet consistent role, catering
maintaining consistent exposure to financially to specific MSME segments with specialised needs,
stable clients. This cautious growth aligns with such as export-oriented businesses or those with
FBs’ strategic preference for quality over quantity, international operations.
targeting export-oriented MSMEs with established The financing approaches of PSBs and PVBs
financial backgrounds. The growth of MSME credit highlight the key challenges facing both formal
within SCBs showcases various strategies. PSBs and informal MSMEs. PSBs, with their focus on
focus on inclusion, PVBs on efficient, competitive financial inclusion, support smaller, informal
growth, and FBs on stability. Together, these MSMEs that lack documentation or collateral,
approaches build a resilient ecosystem supporting though this increases their risk and dependence
diverse MSME needs. on government support. In contrast, PVBs target
Overall, PSB’s share of MSME accounts grew well-established MSMEs, leveraging technology
significantly, demonstrating their commitment for efficiency and profitability but often excluding
to financial inclusion and their response to smaller MSMEs that cannot meet stringent
government initiatives. This trend positions PSBs requirements. These informal MSMEs are often
as key supporters of small businesses that may not forced to turn to costly informal credit sources,
qualify for lending from private or foreign banks. with interest rates of 40–60%, restricting their
In contrast, PVBs reduced their share of MSME growth. This divide reveals the urgent need for
accounts, focusing on established, high-value clients. balanced credit solutions that combine inclusivity
This strategic reallocation likely aims to minimise with effective risk management, addressing the
exposure to smaller, riskier MSMEs, aligning PVBs’ diverse needs of the MSME sector.
 MSME Financing in India: Driving Inclusive Growth and Economic Resilience 5

45.00
40.00
No. of Accounts (in million)

35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
2018-19 2019-20 2020-21 2021-22 2022-23
PSBs 11.30 11.08 15.08 14.97 13.90
PVBs 20.53 27.06 26.68 11.29 7.30
FBs 0.24 0.27 0.26 0.21 0.20
All SCBs 32.07 38.42 42.02 26.47 21.30

Figure 5.3. Credit Flow to the MSME Sector by SCBs-Number of Accounts (in millions)
Source: RBI, ‘Report on Trend and Progress of Banking in India 2022-23’.

25,000.00
Amount Outstanding ( J in billion)

20,000.00

15,000.00

10,000.00

5,000.00

0.00
2018-19 2019-20 2020-21 2021-22 2022-23
PSBs 8,800.33 8,933.15 9,086.59 9,558.60 10849.53
PVBs 5,636.78 6,469.88 7,920.42 9,698.44 10898.33
FBs 669.39 732.79 832.24 853.52 853.49
All SCBs 15,106.51 16.135.82 17,839.25 20,110.57 22601.35

Figure 5.4. Credit Flow to the MSME Sector by SCBs-Amount Outstanding (₹ in billion)
Source: RBI, ‘Report on Trend and Progress of Banking in India 2022–23’.

Figures 5.3 and 5.4 from the Reserve Bank segments, highlighting a balance between inclusivity
of India’s (RBI’s) Report on Trend and Progress and profitability. The growing competition between
of Banking in India 2022–23 illustrate distinct PSBs and PVBs in MSME lending reflects shifting
patterns in MSME lending across different types priorities, as PVBs gain market share, reshaping the
of banks. PSBs continue to maintain high account lending landscape. PSBs promote inclusivity but
volumes but have seen a decline in their share of bear the burden of sustainability, while PVBs pursue
MSME lending. In contrast, PVBs are focusing on risk-managed growth. This credit concentration
larger loans, targeting fewer but more financially within PVBs, though efficient, may limit access
established MSMEs. FBs maintain a minimal for smaller MSMEs who rely on PSBs, potentially
presence in MSME lending, targeting select creating a financing gap that risks sector stability.
accounts, with loan volumes gradually increasing Digital transformation offers a promising solution
over time. This distribution underscores the unique to these challenges, as banks adopt technology
roles played by each banking segment: PSBs provide for streamlined credit assessment and tailored
widespread access to credit, PVBs concentrate MSME products. PVBs, in particular, are leading
on larger, profitable loans, and FBs cater to niche the way in digital platforms and data-driven risk
6 INCLUSIVE FINANCE INDIA REPORT 2023

management. Digital lending has the potential to Figures 5.5 and 5.6 reveal the evolving
enhance credit access for underserved MSMEs, dynamics of MSME financing. Despite a decrease
especially in Tier 3 and Tier 4 cities. However strong in MSME loan volumes, PSBs still hold a large
regulatory frameworks are essential to ensure that share of outstanding loans. Meanwhile, PVBs
these technologies provide fair access to credit. are expanding their share of outstanding loan
Collaboration among banks, regulatory bodies, and amounts, increasingly focusing on medium-sized
MSME associations is key to addressing credit gaps, MSMEs with larger credit requirements. This trend
adapting policies, and building a more inclusive indicates a strategic shift within PVBs towards
MSME financing ecosystem. Public-private more established MSMEs, raising concerns about
partnerships and policy incentives are critical in equitable credit access for smaller MSMEs that
promoting flexible lending models, creating an may be overshadowed by larger, more profitable
equitable balance between inclusivity and efficiency. clients.

120.00%

100.00%

80.00%
Percenatge (%)

60.00%

40.00%

20.00%

0.00%
2018-19 2019-20 2020-21 2021-22 2022-23
FBs 0.75% 0.71% 0.62% 0.80% 0.94%
PVBs 64.02% 70.44% 63.50% 42.64% 34.27%
PSBs 35.23% 28.85% 35.88% 56.56% 65.26%

Figure 5.5. SCB Lending to MSMEs in India across Years – No. of Accounts (all figures are year-wise
percentages)
Source: RBI, ‘Report on Trend and Progress of Banking in India 2022-23’.

70.00%

60.00%

50.00%
Percenatge (%)

40.00%

30.00%

20.00%

10.00%

0.00%
2018-19 2019-20 2020-21 2021-22 2022-23
PSBs 58.26% 55.36% 50.94% 47.53% 48.00%
PVBs 37.31% 40.10% 44.40% 48.23% 48.22%
FBs 4.43% 4.54% 4.67% 4.24% 3.78%

Figure 5.6. SCB lending to MSMEs in India across Years – Amount Outstanding (all figures are year-wise
percentages)
Source: RBI, ‘Report on Trend and Progress of Banking in India 2022-23’.
 MSME Financing in India: Driving Inclusive Growth and Economic Resilience 7

These shifts highlight the need for a balanced Mantri Mudra Yojana (PMMY), showing a strong
MSME financing strategy that bridges the divide focus on grassroots financial inclusion. Likewise,
between formal and informal MSMEs. PSBs have credit outstanding to Small Enterprises grew from
a broad reach, promoting financial inclusion, while ₹6,380.31 billion in FY 2018–19 to ₹8,300 billion
PVBs focus on targeted, risk-managed lending by December 2023, despite a decline in account
that enhances economic resilience. However, this numbers. This consolidation points to a risk-
segmentation risks leaving smaller and informal managed approach by banks, providing higher
MSMEs underfunded. A cohesive approach, credit per account to more stable small enterprises, a
leveraging digital tools, sustainable lending, and strategy likely aimed at enhancing resilience within
balanced credit allocation, is essential to unlocking this vital MSME segment. Furthermore, Medium
the sector's full economic potential. Enterprises saw a 153% increase in outstanding
These lending patterns suggest that smaller credit, rising from ₹1,974.19 billion in FY 2018–19
MSMEs tend to gravitate towards PSBs for moderate to ₹5,000 billion by December 2023. With account
loan sizes, while larger MSMEs increasingly numbers holding steady, this focus on larger loans
rely on PVBs for substantial funding. A deeper suggests that banks view medium enterprises as
understanding of these trends across MSME critical drivers of economic expansion and potential
categories underscores the need for a well-rounded candidates for scalable growth.
financing ecosystem that meets the diverse needs of The pandemic undoubtedly led to a surge in
all MSMEs. emergency credit needs for Micro Enterprises, with
accounts peaking at 39.45 million in December 2020
5.4. BANK CREDIT TO MSME before contracting significantly. This fluctuation
SEGMENTS underscores the MSME sector’s vulnerability
Let us look at the major trends from the graphs to economic shocks, but also its adaptability,
(Figure 5.7 and 5.8) below. From FY 2018–19 to emphasising the need for responsive financial
December 2023,iii outstanding credit for Micro support during crises. Total MSME credit rose from
Enterprises nearly doubled, rising from ₹6,591.02 ₹14,945.52 billioniv in FY 2018–19 to ₹25,900 billion
billion to ₹12,600 billion. Despite fluctuations in by December 2023. This steady growth, despite
the number of accounts, this increase in credit account volatility, signals an increasing focus on
indicates a strategy prioritising substantial support high-value MSME support, aligning with financial
for micro-level businesses, which are essential inclusion goals by emphasising scalable, impactful
to local economic growth and job creation. This MSMEs. At the same time, MSME account numbers
trend aligns with initiatives like the Pradhan decreased from 42.30 million in December 2020

45.00
40.00
No. of Accounts (in million)

35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
2023-24 (As at
2018-19 Dec-20 2020-21 2021-22 2022-23 end-December
2023)
Micro Enterprises 25.56 39.45 38.79 23.96 19.44 24.26
Small Enterprises 2.30 2.32 2.78 2.19 1.57 1.56
Medium Enterprises 0.26 0.53 0.44 0.32 0.32 0.35
MSMEs 28.12 42.30 42.02 26.47 21.33 26.17

Figure 5.7. Bank Credit to MSME Segments for Number of Accounts (in millions)
Source: RBI, ‘Report on Trend and Progress of Banking in India 2022-23’.
 8 INCLUSIVE FINANCE INDIA REPORT 2023
Amount Outstanding ( J in billion)

30,000.00

25,000.00

20,000.00

15,000.00

10,000.00

5,000.00

0.00
2023-24 (As at end-
2018-19 Dec-20 2020-21 2021-22 2022-23
December 2023)
6,591.02 7.631.09 8.210.28 8,826.94 10.500.00 12,600.00
Micro Enterprises 6,380.31 6,522.92 6,629.98 7,222.74 7,500.00 8,300.00
Small Enterprises 1,974.19 2,709.24 2.998.98 4,060.89 4,600.00 5,000.00
Medium Enterprises 14,945.52 16,863.25 17,839.24 20,110.57 22.600.00 25,900.00
MSMEs

Micro Enterprises Small Enterprises Medium Enterprises

MSMEs Linear (Micro Enterprises) Linear (Small Enterprises)
Linear (Medium Enterprises)

Figure 5.8. Bank Credit to MSME Segments for Amount Outstanding (₹ in billion)
Source: RBI, ‘Annual Reports 2019–20, 2020–21, 2021–22, 2022–23 and 2023–24’.

to 21.33 million in FY 2022–23, then partially pattern suggests an increase in the average loan size
rebounded to 26.17 million. The trend towards per account, reflecting a strategic shift by banks
fewer but larger loans suggests banks are focusing on towards fewer but higher-value loans. For micro-
creditworthy MSMEs, aiming to balance financial enterprises, in particular, this trend signals potential
outreach with portfolio stability. The rising credit challenges, as credit becomes more concentrated
per MSME account across categories indicates among a select group, limiting broader access for
greater access to capital, likely supported by newer or smaller players.
government-backed credit guarantee programmes. The roller-coaster trajectory of micro-enterprises
This deepened lending reflects banks’ commitment is particularly striking. Account numbers surged to
to MSME growth potential, particularly for 39.45 million by December 2020, likely in response
enterprises investing in technology and productivity to increased credit demand during the pandemic.
improvements. Indeed, the observed lending trends However, by December 2023, the number of
underscore the need for continued policy support to accounts had sharply dropped to 19.36 million.
expand MSME credit access, especially for smaller Despite this decline in account numbers, the total
enterprises facing persistent credit gaps. Banks credit extended to micro-enterprises continued to
and policymakers could consider tailored financial rise, suggesting that while fewer micro-enterprises
products to meet diverse MSME needs, ensuring received loans, those that did secured larger
sustained support for micro and small businesses, amounts. This increase in credit, paired with the
which are crucial to the economy. drop in account numbers, points to a complex
The data on bank credit to MSMEs from 2018 landscape where access to credit may be becoming
through December 2023 reveals a nuanced story of more exclusive. The trend could reflect regulatory
growth, resilience, and complexity across MSMEs. hurdles or a shift in banks’ risk assessment models,
Outstanding loan amounts across categories have which prioritise stability and financial strength,
shown an upward trend, indicating growing demand leaving some smaller enterprises struggling to meet
for credit as MSMEs seek capital to fuel expansion. the evolving requirements.
However, this upward trajectory is accompanied The story for small enterprises is similarly
by fluctuations in the number of loan accounts, compelling. While account numbers fluctuated,
especially in the micro-enterprise category, which the outstanding credit for this segment grew
saw a significant peak followed by a decline. This consistently, underscoring their expanding capital
 MSME Financing in India: Driving Inclusive Growth and Economic Resilience 9

requirements. This dual trend reflects the ambitions per account reflects a focus on capacity building
of small enterprises to upscale, invest in technology, and scalable investments, particularly for small
and capture larger market shares. However, the and medium enterprises. Yet, this shift towards
decline in account numbers after 2020 also signals fewer but larger loans may limit access to capital
the challenges they face in accessing formal for smaller MSMEs, presenting potential barriers to
credit. Small enterprises may be grappling with financial inclusion that policymakers and financial
heightened regulatory demands and tighter lending institutions must address.
criteria, which favour established businesses with The impact of the pandemic on MSMEs is
stronger credit profiles. This selective approach by particularly evident in the micro-enterprise
banks emphasises stability but also highlights the category, which saw a dramatic increase in account
difficulties smaller players face in navigating a more numbers in 2020, likely driven by emergency credit
regulated lending environment. needs. This spike highlights the sector’s vulnerability
Medium enterprises, positioned between small- to economic disruptions and the importance of
scale firms and larger corporations, show an upward flexible financial support during crises. Post-
trend in credit with a relatively stable number pandemic, however, banks have adopted a more
of accounts. The outstanding credit for medium cautious, selective approach to lending, with an
enterprises more than doubled over this period, emphasis on creditworthy MSMEs to mitigate
reflecting a strategic pivot by banks towards larger risks. This transition underscores the importance of
loans in this category. The reduction in account financial resilience within the MSME sector, where
numbers, alongside increased credit volumes, stable credit access credit is essential for weathering
suggests that medium enterprises are consolidating, economic uncertainties.
with banks viewing them as critical economic Despite these complexities, the steady rise in
drivers. This approach aligns with banks’ focus on total MSME credit—reaching ₹25,900 billion by
risk management and scalable growth, as medium December 2023—reflects the enduring commitment
enterprises are often seen as safer investments due of banks to support the sector. This growth aligns
to their established operations and growth potential. with national financial inclusion goals, emphasising
However, the decline in account numbers could high-impact MSMEs that contribute significantly to
also indicate that only a select group of medium India’s economy. The increase in credit per account
enterprises have successfully navigated recent suggests that banks are prioritising MSMEs with
regulatory changes, benefiting from more significant demonstrated growth potential, particularly those
capital while leaving others behind. willing to invest in technology and productivity
The introduction of the Udyam Registration enhancements. However, ensuring that this support
marked a paradigm shift in MSME classification, extends across all MSME categories remains crucial
aiming to streamline the registration process and for fostering a balanced and inclusive financial
establish a standard framework for the sector. While landscape.
the Udyam framework promises long-term benefits The lending trends also highlight the evolving
by simplifying the credit process, it also presented needs of MSMEs, as the sector increasingly requires
short-term challenges, evident in the contraction tailored financial products that align with their
of registered MSME accounts. The stricter growth trajectories. The concentration of credit
documentation and compliance requirements for within a limited number of accounts suggests
the new framework have posed barriers for some that larger MSMEs with scalable operations are
enterprises, particularly smaller and informal ones, better positioned to benefit. However, smaller
underscoring the sector’s vulnerability during enterprises—especially those at the micro level—
periods of regulatory adjustment. For many MSMEs, may require customised solutions that address
especially micro and small enterprises, the transition their unique challenges. Policymakers and banks
to Udyam has highlighted the need for adaptability alike could explore innovative financial models
and alignment with formal financial requirements. and guarantee schemes to provide equitable
The overarching narrative from 2018 to 2023 support, ensuring that MSMEs of all sizes have
is one of resilience juxtaposed with challenges. access to the resources necessary to thrive in an
MSMEs have shown an unwavering drive to expand, evolving economic landscape. Ultimately, these
adapt, and innovate. However, these ambitions are credit patterns underscore the dual narrative of
tempered by the realities of a transforming regulatory promise and challenge within the MSME sector.
and lending landscape, which favours stability and While MSMEs continue to demonstrate growth
risk-managed growth. The rise in average loan sizes and resilience, their journey is marked by hurdles
10 INCLUSIVE FINANCE INDIA REPORT 2023

in adaptation and the need for structural support. The MSME asset quality profile from March
For India’s economy, which relies heavily on the 2021 to September 2023 reflects significant
contributions of MSMEs, recognising these trends improvements in resilience and financial health
and addressing emerging barriers is essential. As among MSMEs, as shown in Table 5.2 and Figures
MSMEs continue to expand and innovate, ensuring 5.9 and 5.10. During this period, performing
their access to stable and inclusive financing will be loans (0 Days Past Due) increased from 74.0%
central to sustaining their role as a dynamic pillar of to 84.6% by March 2023, indicating better credit
India’s economic fabric. discipline and stronger borrower reliability. This
trend underscores the success of banks in targeting
5.5 MSME ASSET QUALITY ANALYSIS financially stable MSMEs, contributing to a stable
portfolio and sustainable sector growth. Notable
Table 5.2 below presents a detailed compilation of
improvements were observed in early warning
the MSME asset quality profile from March 2021 to
categories, with SMA 0 (1–30 days overdue) peaking
September 2023.
at 8.8% in December 2021 due to pandemic-related
Table 5.2. MSME Asset Quality Profile of SCBs (Percentages) pressures but reducing to 5.1% by March 2023.
Bank Groups PSBs + PVBs Similarly, SMA 1 (31–60 days overdue) and SMA 2
(61–90 days overdue) levels dropped significantly,
0 Days Special Mention SMA 1 SMA 2 GNPA
Past Due Account (SMA) 0 showing MSMEs’ increased ability to manage
short-term financial strains. The reduction in these
March 2021 74.0 7.3 5.7 2.2 10.8
categories highlights effective risk management
June 2021 72.4 8.6 3.8 3.4 11.9 practices, allowing banks to proactively mitigate
September 2021 76.3 6.6 2.6 3.1 11.3 potential defaults. The Gross Non-Performing
December 2021 75.4 8.8 3.1 2.3 10.4 Assets (GNPA) rate, a key indicator of defaults,
March 2022 79.7 6.4 3.5 1.1 9.3 decreased sharply from 10.8% in March 2021
June 2022 79.6 6.4 3.5 2.2 9.8 to 4.7% by September 2023, reflecting a 6.1%
improvement. This sustained decline demonstrates
September 2022 81.6 6.7 1.9 2.1 7.7
the sector’s recovery, resilience, and ability to meet
December 2022 82.2 6.3 2.0 2.0 7.4
financial obligations. Targeted lending initiatives,
March 2023 84.6 5.1 2.6 0.9 6.8 data-driven assessments, and regulatory measures
September 2023 – – – 1.7 4.7 like the Emergency Credit Line Guarantee
Source: RBI, ‘Financial Stability Report (Issue No. 25) June 2022, (Issue No. 27) June Scheme (ECLGS) have contributed to this positive
2023 and (Issue No. 28) December 2023’. trajectory.

4 14.00%

3.5 12.00%

3
10.00%
2.5
8.00%
SMA 2

GNPA
2
6.00%
1.5
4.00%
1

0.5 2.00%

0 0.00%
September December March September
March 2021 June 2021 September December March June 2022
2021 2021 2022 2022 2022 2023 2023
GNPA 10.80% 11.90% 11.30% 10.40% 9.30% 9.80% 7.70% 7.40% 6.80% 4.70%
SMA 2 2.2 3.4 3.1 2.3 1.1 2.2 2.1 2 0.9 1.7

Figure 5.9. MSME Asset Quality Profile March 2021 to September 2023
Source: RBI, ‘Financial Stability Report (Issue No. 25) June 2022, (Issue No. 27) June 2023 and (Issue No. 28) December 2023’.
 MSME Financing in India: Driving Inclusive Growth and Economic Resilience 11

120.00%
100.00%
80.00%
60.00%
Percenatge (%)

40.00%
20.00%
0.00%
-20.00%
-40.00%
-60.00%
-80.00%
September December March 2022 June 2022 September December March 2023 September
June 2021 2021 2021 2022 2022 2023
SMA 2 54.55% -8.82% -25.81% -52.17% 100.00% -4.55% -4.76% -55.00% 88.89%
GNPA 10.19% -5.04% -7.96% -10.58% 5.38% -21.43% -3.90% -8.11% -30.88%

SMA 2 GNPA

Figure 5.10. MSME Asset Quality Profile SMA2 and GNPA, % Change Across Quarters

Further support measures, such as the Udyam adaptation, and recovery within the sector. The
Registration system, are helping formalise MSME improvements in performing loans, reductions in
access to structured financial resources, reducing early arrears, and the substantial GNPA decrease
credit risks and stabilising the sector. Improved asset showcase a strengthened sector that supports India’s
quality allows MSMEs to pursue growth initiatives, broader economic stability and growth goals. This
invest in technology, and contribute significantly to positive trajectory positions MSMEs as pivotal
India’s regional development and self-reliance goals. contributors to financial inclusion and long-term
While these trends are promising, ongoing vigilance economic development.
is essential for both banks and MSMEs. Banks must
continue to uphold rigorous risk management to 5.6 MSME FINANCING BY SFBS
maintain momentum, while MSMEs must focus
on strategic financial planning to navigate future The MSME share of SFB advances (Figure 5.11)
economic uncertainties effectively. declined from 36.7% in 2019 to 24.3% in 2023, despite
In summary, the MSME asset quality profile from an increase in absolute lending volumes. This shift
March 2021 to September 2023 highlights resilience, suggests that SFBs are diversifying their portfolios to

40% 2,000.00
Loans and Advances to MSMEs (in %)

TotalLoans and Advances and Advance to MSMEs

35% 1,800.00
1,600.00
30%
1,400.00
25% 1,200.00
(Amount in billion)

20% 1,000.00
15% 800.00
600.00
10%
400.00
5% 200.00
0% 0
2018 2019 2020 2021 2022 2023
Total Loans and Advances 467.55 698.57 905.76 1.086.13 1.358.02 1.778.87
Advance to MSMES 144.94 256.37 324.26 294.34 391.11 432.27
Loans and Advances to MSMEs (in %) 31% 36.70% 35.80% 27.10% 28.80% 24.30%

Figure 5.11. Loans and Advances to MSMEs (all figures are % of total SFB advance) and Total Loans and
Advances and Advance to MSMEs by SFBs (in ₹billion)
Source: RBI, ‘Report on Trend and Progress of Banking in India 2018-19, 2019-20, 2020-21, 2021-22 and 2022-23’.
12 INCLUSIVE FINANCE INDIA REPORT 2023

manage risk while continuing to provide significant in SFBs’ MSME lending reflects a balance between
lending to MSMEs. Total loans from SFBs grew growth and stability, enabling them to support
fourfold, from ₹467.55 billion in 2018 to ₹1,778.87 MSMEs without compromising portfolio health.
billion in 2023,v underscoring their role in bridging This recalibrated approach signals a mature strategy
finance gaps, especially in underserved areas, while that promotes inclusive finance while protecting
maintaining a broad lending approach. The volatility SFBs’ financial sustainability. To maintain focus on
in the MSME lending share points to SFBs’ adaptive MSMEs, policymakers could consider introducing
risk management, likely in response to economic targeted incentives that encourage SFBs to prioritise
disruptions such as the pandemic. SFBs have adjusted MSME lending without overextending their risk
their portfolios to mitigate sector-specific challenges exposure. Such measures would reinforce MSMEs’
while maintaining a stable credit flow to MSMEs. role in driving economic resilience and growth. The
Despite the decline in the percentage allocation, SFBs’ growth in absolute MSME loan values highlights
absolute MSME lending rose annually, reinforcing SFBs’ ongoing commitment to inclusive finance.
their commitment to supporting the sector’s financial MSME support remains a core component of SFBs’
inclusion goals. This consistent increase reflects SFBs’ long-term strategy, especially in regions where
alignment with national objectives to strengthen MSMEs play a foundational role in local economies.
the MSME ecosystem. The reduced share of MSME
advances suggests that further policy incentives could 5.7. PRADHAN MANTRI MUDRA
encourage SFBs to prioritise this sector. Measures YOJANA (PMMY) AND MUDRA
such as enhanced credit guarantees or sector-specific The PMMY serves as a foundational pillar for
support could help SFBs expand MSME lending in a MSME financing in India, with a specific focus
balanced manner. on enhancing access to credit for micro and small
MSME lending by SFBs grew from ₹144.94 enterprises. Implemented under the guidance of
billion in 2018 to ₹432.27 billion in 2023, the Micro Units Development & Refinance Agency
demonstrating resilience despite the challenges Ltd. (MUDRA), the programme addresses critical
faced by the sector. This growth highlights financing gaps through a tiered loan structure—
SFBs’ crucial role in supporting MSMEs, even Shishu, Kishore, and Tarun—each designed to
under conditions that typically require rigorous support enterprises at different stages of growth. This
monitoring and management. The diversification analysis explores the impact of PMMY from 2018 to
of SFB loan portfolios indicates a strategic move 2024 (Figures 5.12, 5.13 and 5.14), evaluating trends
towards long-term stability. While MSME support across loan categories, borrower demographics,
remains a priority, the allocation of more loans to and institutional contributions to understand the
non-MSME segments reflects an effort to mitigate programme’s effectiveness in promoting financial
risks associated with the MSME sector. The trend inclusion and driving economic growth.

80
Total No. of Accounts (in million)

70
60
50
40
30
20
10
0
2018-19 2019-20 2020-21 2021-22 2022-23 2023-24
Shishu Loan 51.51 54.48 40.18 41.72 43.08 41.63
Kishore Loans 6.61 6.47 9.49 11.09 17.92 23.63
Tarun Loans 1.76 1.29 1.07 0.99 1.32 1.52
Total 59.88 62.24 50.74 53.8 62.32 66.78

Shishu Loan Kishore Loans Tarun Loans Total

Figure 5.12. PMMY Total Number of Accounts from 2018–19 to 2023–24

Source: PMMY Bank Wise Performance 2018-19, 2019-20, 2020-21, 2021-22, 2022-23 and 2023-24
 MSME Financing in India: Driving Inclusive Growth and Economic Resilience 13

6,000.00
Total Sanction Amount ( J in billion)

5,000.00

4,000.00

3,000.00

2,000.00

1,000.00

0.00
2018-19 2019-20 2020-21 2021-22 2022-23 2023-24
Shishu Loan 1,423.44 1,635.28 1,099.53 1,247.47 1.427.66 1,489.37
Kishore Loans 749.69 783.55 792.90 767.19 1,097.65 1,297.91
Tarun Loans 1,043.78 955.75 1,325.16 1,376.44 2,040.07 2,622.85
Total 3,216.91 3,374.58 3,217.59 3,391.10 4,565.38 5,410.13

Figure 5.13. PMMY Total Sanction Amount (₹ in billion) from 2018-19 to 2023-24
Source: PMMY Bank Wise Performance 2018-19, 2019-20, 2020-21, 2021-22, 2022-23 and 2023-24
Total Disbursement Amount ( J in billion)

6,000.00

5,000.00

4,000.00

3,000.00

2,000.00

1,000.00

0.00
2018-19 2019-20 2020-21 2021-22 2022-23 2023-24
Shishu Loan 1,396.51 1.627.83 1,086.37 1,239.69 1,416.10 1,477.85
Kishore Loans 998.59 914.23 1,272.39 1,333.89 2,009.37 2,570.94
Tarun Loans 722.70 754.71 758.78 740.44 1,078.77 1,274.79
Total 3,117.80 3,296.77 3,117.54 3,314.02 4.504.24 5,323.58

Figure 5.14. PMMY Total Disbursement Amount (₹ in billion) from 2018–19 to 2023–24
Source: PMMY Bank Wise Performance 2018-19, 2019-20, 2020-21, 2021-22, 2022-23 and 2023-24

The Shishu loan category, with a loan cap of and ₹618.37 billion by FY 2023–24. This aggressive
₹50,000, is instrumental in fostering entry-level market expansion by private banks underscores
entrepreneurship. Shishu loans predominantly serve their operational efficiency, driven largely by digital
early-stage micro-enterprises and self-employed lending platforms that streamline access to low-value
individuals who need small-scale financing to start credit. PSBs, meanwhile, maintain a strong presence,
their ventures. This category commands the highest steadily increasing Shishu loans across underserved
volume of loans, reflecting its central role in grassroots and semi-urban areas. Regional Rural Banks (RRBs)
financial inclusion. Between FY 2018–19 and FY also play a critical role by focusing on financial
2023–24,vi the number of Shishu loan accounts saw access in rural regions where traditional banking
significant growth, with PVBs leading the charge. infrastructure is limited. The steady growth in Shishu
Private banks increased their reach from 11.23 loans reflects PMMY’s commitment to extending
million Shishu loan accounts with ₹343.31 billion in basic financial support to first-time entrepreneurs
sanctions in FY 2018–19 to 17.27 million accounts and financially excluded populations.
14 INCLUSIVE FINANCE INDIA REPORT 2023

Kishore loans, ranging from ₹50,001 to ₹5 lakh, role in bridging the gap between micro-loans and
are designed to meet the needs of mid-tier MSMEs substantial business financing, supporting medium-
looking to scale up their operations. This category sized enterprises that are ready to scale.
captures the highest sanction amounts, indicating the The borrower demographic analysis under
demand for growth capital as MSMEs move beyond PMMY reveals a focused approach to inclusion
initial setup to more structured business operations. across marginalised groups such as Scheduled Caste
Both PSBs and PVBs are pivotal in supporting Kishore (SC), Scheduled Tribe (ST), Other Backward Classes
loans. Private banks, in particular, show strong growth (OBC), women entrepreneurs, and first-time
in this segment, increasing sanctioned amounts from business owners. Women entrepreneurs, notably,
₹199.27 billion in FY 2018–19 to ₹928.17 billion in FY held 71.03% of PMMY accounts in FY 2022–23,
2023–24. Their rapid growth reflects the competitive underscoring the programme’s commitment to
advantage they offer through streamlined digital gender inclusivity. The growth in loan sanctions for
processes and customer-oriented service models, women entrepreneurs, from ₹962.53 billion in FY
which are attractive to MSMEs seeking speed and 2018–19 to ₹1,093.55 billion in FY 2023–24,vii reflects
flexibility in financing options. PSBs, although PMMY’s strategic focus on empowering women in
facing competition from private banks, maintain a business. The programme’s consistent support for
solid share of Kishore loans by balancing financial SC and ST borrowers aligns with national objectives
outreach with prudent risk management practices. to provide equitable access to financial resources,
Non-Banking Financial Companies (NBFCs) and helping to bridge historical disparities. Loans to SC
Small Finance Banks (SFBs) have also contributed and ST borrowers have increased steadily, ensuring
significantly to this segment by providing credit to these groups have the resources needed to pursue
semi-urban and rural MSMEs, often underserved entrepreneurial ventures. The inclusion of new
by larger banks. RRBs remain an essential support entrepreneurs is equally significant, as PMMY
system for rural MSMEs, ensuring consistent loan supports startup capital for fresh business ventures.
access for enterprises in geographically isolated areas. This emphasis on inclusion strengthens PMMY’s
The competitiveness in the Kishore loan category role in fostering an equitable entrepreneurial
indicates a well-functioning market that effectively ecosystem, where financial access is provided across
meets the credit needs of growing MSMEs across diverse socio-economic backgrounds.
urban and rural areas. Institutional performance under PMMY
Tarun loans, ranging from ₹5 lakh to ₹10 illustrates a multi-faceted approach to MSME
lakh, target more established businesses that financing. PSBs, particularly the State Bank of
require significant capital to expand or modernise India (SBI) and its associates, maintain a dominant
operations. This category is vital for MSMEs that position in Shishu loans, leveraging their expansive
are ready to scale up and invest in substantial capital reach to serve underserved populations. However,
improvements, such as machinery or infrastructure PVBs are aggressively expanding across all
upgrades. PSBs continue to lead in Tarun loans, categories, especially Kishore loans, by leveraging
increasing their sanctioned amounts from ₹284.08 digital innovations to provide accessible financing
billion in FY 2018–19 to ₹594.20 billion in FY options for MSMEs seeking more flexible solutions.
2023–24, reflecting their mandate to support mid- NBFCs focus on selective lending strategies,
sized businesses, particularly in urban and semi- supporting niche borrower segments in semi-
urban areas. While PVBs focus less on high-volume urban areas. Microfinance Institutions (MFIs) play
outreach, they strategically support segments a critical role in providing financial services to those
within the Tarun category, catering to enterprises at the grassroots level, often surpassing lending
with strong growth trajectories. RRBs contribute targets. These institutions prioritise efficient loan
to the rural sector’s demand for Tarun loans by disbursement, making financial services accessible
providing larger loans for rural-based MSMEs. for micro-enterprises in regions underserved by
NBFCs and NBFC-Microfinance Institutions traditional banks. SFBs consistently target micro and
(NBFC-MFIs) have a limited role in this category, small entrepreneurs, particularly through Shishu
focusing primarily on micro-loans and niche and Kishore loans, ensuring financial inclusion for
financing segments. Their constrained engagement low-income segments across diverse regions.
in Tarun loans underscores their strategic decision The segmented approach within PMMY,
to concentrate on micro-entrepreneurs, particularly represented by Shishu, Kishore, and Tarun loans,
those who may not yet qualify for larger loan sizes. effectively addresses the financing needs of MSMEs
Overall, the Tarun loan category reflects PMMY’s at different growth stages. Shishu loans, comprising
 MSME Financing in India: Driving Inclusive Growth and Economic Resilience 15

the largest volume, cater to nascent businesses, stage of growth, fostering both initial entrepreneurial
while Kishore loans capture a significant portion of ventures and significant business expansions.
sanctioned amounts, reflecting strong demand for The programme’s inclusive strategy ensures that
growth capital. Tarun loans, although fewer in volume, traditionally underserved communities, such as SC/
provide substantial support for enterprises requiring ST groups, women, and new entrepreneurs, receive
larger-scale capital investments. This segmentation targeted financial support. Institutional diversity
within PMMY shows an evolving understanding of within PMMY further enhances the programme’s
MSME development, as Shishu loans focus on entry- reach and impact, with PSBs, PVBs, NBFCs, and
level finance while Kishore and Tarun loans foster the MFIs all contributing uniquely to financial inclusion
growth and expansion of established businesses. and economic empowerment. As PMMY continues
The institution-wise breakdown of loan types to evolve, its role in promoting sustainable economic
demonstrates a strategic allocation of resources, with development remains central to India’s vision of
PSBs maintaining dominance in Shishu loans but inclusive growth, bridging financial disparities,
facing increased competition from PVBs and NBFC- and strengthening the MSME ecosystem across the
MFIs. NBFCs focus on niche markets, while SFBs country.
provide steady support for micro-entrepreneurs.
The competitive dynamics in the Kishore loan 5.8. SMALL INDUSTRIES
segment showcase an adaptive landscape, where DEVELOPMENT BANK OF INDIA
each institution leverages its strengths to serve mid- (SIDBI) AND MSMES
tier MSMEs. PSBs maintain a significant presence
by balancing reach with responsible lending, The Small Industries Development Bank of India
while PVBs capture market share by focusing on (SIDBI)viii plays a multifaceted role in supporting
rapid, flexible loan services. In the Tarun loan India’s MSME sector through strategic financing,
category, both public and private banks play key digital innovation, and entrepreneurship
roles in supporting the expansion of medium-sized promotion. As the principal financial institution for
businesses, a critical aspect of economic growth and MSMEs, SIDBI has made significant contributions
job creation in the MSME sector. to expanding credit access and fostering sustainable
Thus, PMMY’s structured approach to loan growth among small and medium businesses. This
segmentation, its focus on marginalised borrower analysis (Figure 5.15) reviews the recent trends in
groups, and involvement of a diverse range of SIDBI’s core operations and highlights the broader
financial institutions underscore its comprehensive implications for the MSME sector, drawing insights
role in MSME financing. By addressing the varied from the financial metrics provided.
credit needs of MSMEs through Shishu, Kishore, and SIDBI’s role in supporting MSME financing in
Tarun loans, PMMY supports enterprises at every India has expanded significantly, marked by a 79%
4000
3500
3000
2500
J in billion

2000
1500
1000
500
0
Disbursement
Sanction Disbursement Disbursement
March 2021 Outstanding Sanction March 2022 Outstanding Sanction March 2023 Outstanding
Direct Credit 47.46 40.07 115.81 67.6 56.73 141.87 87.8 65 184.09
Refinance to NBFC 75.62 78.02 112.92 131.78 126.77 179.35 220.37 229.8 334.15
Refinance to MFI 27.17 25.83 16.72 41.78 28.93 31.18 41.2 38.12 49
Refinance to Banks 816.37 816.37 1,316.64 1,227.81 1,223.35 1,668.32 2,420.54 2,420.54 2,981.73
Total 966.62 960.29 1,562.09 1,468.97 1,435.78 2,020.72 2,769.91 2,753.46 3,548.97

Figure 5.15. Core Operations at a Glance by SIDBI (in ₹ billion)

Source: SIDBI Annual Report 2021-22 and 2022-23
16 INCLUSIVE FINANCE INDIA REPORT 2023

increase in bank refinancing, from ₹1,668.32 billion investments and fostering innovation across sectors.
in March 2022 to ₹2,981.73 billion by March 2023. This support highlights SIDBI’s role in encouraging
Through partnerships with 49 banks, SIDBI broadens entrepreneurial growth and innovation beyond
financial access for MSMEs, aligning with govern- traditional MSMEs.
ment objectives of economic inclusion and resilience. SIDBI’s role in supporting MSME financing in
Its support for NBFCs, which focus on underserved India has expanded significantly, marked by a 79%
sectors, also saw a notable rise, with refinanced loans increase in bank refinancing, from ₹1,668.32 billion
increasing by 86% to ₹334.15 billion and disburse- in March 2022 to ₹2,981.73 billion by March 2023.
ments also rising significantly. This diversification in Through partnerships with 49 banks, SIDBI broadens
partnerships with banks and NBFCs reflects SIDBI’s financial access for MSMEs, aligning with govern-
inclusive financing approach for MSMEs that may ment objectives of economic inclusion and resilience.
not qualify for traditional bank loans. Its support for NBFCs, which focus on underserved
SIDBI’s support extends to MFIs, which focus on sectors, also saw a notable rise, with refinanced loans
rural and low-income entrepreneurs. Its MFI portfolio increasing by 86% to ₹334.15 billion and disburse-
grew by 57% to ₹49 billion in FY 2023, highlighting ments also rising significantly. This diversification in
its commitment to rural development and grassroots partnerships with banks and NBFCs reflects SIDBI’s
economic growth. The introduction of three new inclusive financing approach for MSMEs that may
financial products under SLF-3 for small MFIs and not qualify for traditional bank loans.
digital finance entities demonstrates SIDBI’s ongoing SIDBI’s support extends to MFIs, which focus on
responsiveness to evolving MSME needs. rural and low-income entrepreneurs. Its MFI portfolio
Direct credit to MSMEs has also grown, with the grew by 57% to ₹49 billion in FY 2023, highlighting
portfolio reaching ₹184.09 billion by March 2023. its commitment to rural development and grassroots
Leveraging real-time data from public databases, economic growth. The introduction of three new
SIDBI’s lending process has become more data- financial products under SLF-3 for small MFIs and
driven, reducing risks and enhancing credit access digital finance entities demonstrates SIDBI’s ongoing
for MSMEs. Digital transformation supports SIDBI’s responsiveness to evolving MSME needs.
initiatives, illustrated by platforms like TReDS, Direct credit to MSMEs has also grown, with the
Jocata Sumpoorn (Box 5.1), an Udyamimitra, portfolio reaching ₹184.09 billion by March 2023.
which streamline loan access and expedite credit Leveraging real-time data from public databases,
disbursements. Innovations such as ‘Quick Bank SIDBI’s lending process has become more data-
Loans under an Hour’ and blockchain-based security driven, reducing risks and enhancing credit access
for lending showcase SIDBI’s dedication to financial for MSMEs. Digital transformation supports SIDBI’s
security and transparency, instilling confidence in initiatives, illustrated by platforms like TReDS,
MSMEs regarding digital services. SIDBI’s impact Jocata Sumpoorn (Box 5.1), an Udyamimitra,
extends to the startup ecosystem through its Fund which streamline loan access and expedite credit
of Funds for Startups, fuelling venture capital disbursements. Innovations such as ‘Quick Bank

BOX 5.1. THE JOCATA SUMPOORN INDEXix

The Jocata Sumpoorn index provides insights into the financial health of MSMEs. The latest reading of 0.56 in August
2024, down from 0.60 in July, signals cautious expansion in MSME activity amidst economic strain, in line with slowdowns
in FMCG, core industries, and automobile sales. Geopolitical tensions and variable export markets pose additional
challenges, with only a small fraction of MSMEs engaged in exports. Sectors such as engineering and electronics have
performed well, while exports in gems and jewellery have declined, underscoring the need for policy support to boost
MSME export capabilities.
Agricultural MSMEs are affected by inconsistent monsoon patterns, with variations in rainfall impacting crop-dependent
MSMEs. SIDBI’s rural support aims to provide financial stability in light of these agricultural challenges, helping MSMEs
navigate climate-related impacts. Furthermore, the festive season offers potential demand growth for MSMEs, as evidenced
by stronger sales in two-wheelers and tractors. However, the growth trajectory will depend on inventory strategies in
larger industries. SIDBI’s emphasis on cash-flow-based lending and reduced reliance on traditional collateral models
enhances MSME credit accessibility, positioning them to capitalise on emerging market opportunities.
 MSME Financing in India: Driving Inclusive Growth and Economic Resilience 17

Loans under an Hour’ and blockchain-based security transformation, SIDBI fosters financial inclusion
for lending showcase SIDBI’s dedication to financial and aligns with national economic goals. Its diverse
security and transparency, instilling confidence in strategies, responsive to changing MSME needs,
MSMEs regarding digital services. SIDBI’s impact underscore SIDBI’s role in advancing MSME
extends to the startup ecosystem through its Fund resilience and contributing to India’s sustained and
of Funds for Startups, fuelling venture capital inclusive economic growth.
investments and fostering innovation across sectors.
This support highlights SIDBI’s role in encouraging 5.9. THE CREDIT GUARANTEE FUND
entrepreneurial growth and innovation beyond TRUST FOR MICRO AND SMALL
traditional MSMEs.
ENTERPRISES (CGTMSE) DATA
Thus, SIDBI’s growing support for the MSME
ANALYSIS
sector spans a range of financial tools, digital The Credit Guarantee Fund Trust for Micro and
innovations, and partnerships. With strong Small Enterprises (CGTMSE) data from Figures
growth in refinancing, direct credit, and digital 5.16, 5.17, and 5.18 offers a detailed perspective on

900,000
800,000
700,000
600,000
500,000
400,000
300,000
200,000
100,000
0
2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23
Total Number of Cases 403,422 513,978 452,127 263,195 435,520 838,947 619,687 709,883 544,938
Claims Settled (Number) 25,948.0 34,812.0 39,069.0 33,980.0 36,606.0 39.937.0 26,427.0 32,963.0 27,609.0

Total Number of Cases Claims Settled (Number)

Figure 5.16. CGTMSE Financial Year-Wise Total Number of Cases and Claims Settled (Numbers)
Source: https://dashboard.msme.gov.in/cgtmse.aspx

600

500
(Amount in J billion)

400

300

200

100

0
2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23
Credit Guarantee Extended Amount 212.75 199.49 199.31 190.66 301.69 452.15 313.49 552.18 459.22
Claims Settled 7.18 10.02 10.38 9.27 7.64 8.8 5.65 7.43 5.46
Credit Guarantee Extended Amount Claims Settled

Figure 5.17. CGTMSE Financial Year-Wise Credit Guarantee Extended Amount and Claims Settled (in ₹ billion)
Source: https://dashboard.msme.gov.in/cgtmse.aspx
18 INCLUSIVE FINANCE INDIA REPORT 2023

14.00%

12.00%

10.00%

8.00%

6.00%

4.00%

2.00%

0.00%
2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23
Claims to Guarantees (for Number of cases) 6.43% 6.77% 8.64% 12.91% 8.41% 4.76% 4.26% 4.64% 5.07%
Claims to Guarantees (for Amounts) 3.37% 5.02% 5.21% 4.86% 2.53% 1.95 1.80% 1.35% 1.19%

Claims to Guarantees (for Number of cases) Claims to Guarantees (for Amounts)

Figure 5.18. Claims to Guarantees Percentages for Number of Cases and Amounts (in percentages)
Source: https://dashboard.msme.gov.in/cgtmse.aspx

the credit trends, reliance on guarantee schemes, and small-scale enterprises during turbulent times,
claims settlement dynamics within India’s MSME CGTMSE solidifies the foundations of India’s MSME
sector across recent fiscal years. This analysis reflects ecosystem, contributing to the sector’s sustained
CGTMSE’s critical role in stabilising MSME credit, growth and resilience.
especially during significant economic shifts such as
demonetisation and the COVID-19 pandemic. 5.10. TREDS DATA ANALYSIS
The CGTMSE data encapsulates both the
challenges and resilience of India’s MSME sector The analysis of the Trade Receivables Discounting
over the years. The increase in claims following System (TReDS) data (Table 5.3) shows the
demonetisation underscores CGTMSE’s role in platform’s rapid growth and its increasingly
providing a financial cushion for MSMEs facing critical role in addressing the financing needs of
abrupt economic disruptions. The record guarantee India’s MSMEs. Launched by the RBI in 2014 and
amounts in 2021–22 and the declining claims operationalised through three licensed platforms
ratio in 2022–23 reflect CGTMSE’s adaptability since 2017, TReDSx enables MSMEs to convert
as MSMEs transition from crisis management to receivables from corporates, government entities,
growth. This analysis highlights CGTMSE dual role and PSUs into ready cash by discounting their
in facilitating credit access and fostering long-term invoices. This mechanism directly addresses
financial stability within the sector. By responding MSMEs’ working capital needs, thereby improving
dynamically to economic shifts and supporting liquidity and financial stability within the sector.

Table 5.3. Progress in MSME Financing Through TReDS

Financial Year Invoices Uploaded Amount Uploaded Invoices Financed Amount Financed
(₹ billion) (₹ billion)
2018–19 2,51,695 67.00 2,32,098 58.54
2019–20 5,30,077 130.88 4,77,969 111.66
2020–21 8,61,560 196.70 7,86,555 170.80
2021–22 17,33,553 441.12 16,40,824 403.09
2022–23 27,24,872 839.55 25,58,531 766.45
Source: RBI, Report on Trend and Progress of Banking in India 2022–23
 MSME Financing in India: Driving Inclusive Growth and Economic Resilience 19

The TReDS platform has shown remarkable digital solutions that enable efficient, transparent,
growth in facilitating MSME financing in India, with and scalable liquidity management. TReDS addresses
substantial year-over-year increases in the number a critical gap by providing MSMEs with prompt
of invoices processed and the total amount financed. payments without collateral requirements, a key
From 2018–19 to 2022–23, the number of invoices capability in a landscape where delayed payments
uploaded on TReDS surged more than tenfold, are common. The platform’s high conversion rate and
from 251,695 to 2,724,872, while the total amount growing user base position it as a vital component of
uploaded skyrocketed from ₹67 billion to ₹839.55 India’s digital financial ecosystem, supporting MSME
billion. The financed amount showed similar financial stability and growth.
growth, increasing from ₹58.54 billion in 2018–19 In essence, TReDS has emerged as a crucial player
to ₹766.45 billion in 2022–23, highlighting TReDS’ in India’s MSME financing framework, achieving
effectiveness in converting uploaded invoices into exponential growth in transactions, total amounts
funded transactions. processed, and user trust from 2018–19 to 2022–23.
The fiscal year 2021–22 marked a significant Its scalable model for meeting MSME funding needs
milestone, with the number of invoices uploaded and fostering financial inclusion cements its role as
doubling from the previous year and the uploaded a key driver in the digital transformation of India's
amount escalating from ₹196.70 billion to ₹441.12 financial landscape for MSMEs.
billion. The number of financed invoices and the
amount financed also more than doubled, reflecting 5.11. DIGITAL LENDING
TReDS’ ability to meet MSME liquidity needs
during the COVID-19 recovery period. India’s MSME financing landscape is undergoing
Growth continued in 2022–23, with a 57% increase a revolutionary transformation, largely driven by
in uploaded invoices and a 90% rise in the uploaded digital lending. Historically, traditional financial
amount, reaching ₹839.55 billion. The number of institutions struggled to meet MSMEs’ unique
financed invoices grew to 2,558,531, with a financed funding needs, leaving a substantial financing gap.
amount of ₹766.45 billion. TReDS maintained a Digital lending—characterised by fast, paperless,
high success rate of 93.89% in converting uploaded and data-driven loan processes—has empowered
invoices into financed transactions, demonstrating MSMEs. This shift aligns with government goals for
strong operational efficiency and trust among financial inclusion and is supported by entrepreneurs
MSMEs, corporate buyers, and financiers. This rise who are tech-savvy and have access to smartphones
in participation underscores the platform's broad and the internet. This digital shift enables MSMEs
acceptance as a reliable, collateral-free financing to secure funds with unprecedented speed and ease,
option, particularly valuable for MSMEs constrained altering their growth trajectories.
by traditional financing models. Digital lending platforms (Box 5.2) streamline
The sustained growth in TReDS utilisation reflects the loan process, often disbursing funds within hours
a broader shift in MSME financing in India towards by utilising automated data analytics and digital

BOX 5.2. AI-DRIVEN DIGITAL LENDING: THE NEW KID IN TOWN

AI-driven digital lending has deepened the impact of this shift, as platforms leverage predictive analytics and machine
learning for faster, more accurate loan assessments. FinTech companies like Indifi, Capital Float, Clix Capital, and
Lendingkart exemplify this trend, using data analytics to assess creditworthiness without traditional paperwork.
Companies like NeoGrowth and SME Corner have reduced physical documentation requirements, expediting the lending
process and offering collateral-free loans within 24 hours. This shift positions digital lending as a mainstream choice over
traditional banks due to its convenience and efficiency.
The ecosystem includes a range of digital lenders, each with unique strengths. For example, Capital Float provides short-
term loans for online sellers, while Clix Capital offers a variety of financial solutions. The rapid, data-backed decisions
and quick disbursements are particularly beneficial for MSMEs, which often face liquidity constraints, enabling them
to access funds more efficiently. The ease of access provided by digital lending and the ability to assess loan eligibility
instantly, based on real-time data, enable customised financial products tailored to each MSME’s needs, cutting down on
time-consuming bank processes.
20 INCLUSIVE FINANCE INDIA REPORT 2023

With growing internet usage across India, digital lending is expected to become the dominant source of unsecured loans
for MSMEs. FinTech lenders like Vayana Network and CoinTribe play a key role in offering accessible working capital
solutions, often in partnership with banks and NBFCs, broadening their reach and impact. This rise in digital lending,
projected to multiply fifteenfold by 2023, showcases the synergy between technology and finance, allowing MSMEs to
secure credit without being restricted by geography, collateral, or conventional credit scores.

management. This approach allows lenders to reach government initiatives like the Udyam Registration
smaller enterprises traditionally viewed as high- and platforms like TReDS are redefining MSME
risk, broadening access to capital. These platforms support structures, enabling more robust access to
enhance financial transparency by evaluating finance and enhancing liquidity management. This
creditworthiness using alternative data sources, such discussion identifies key lessons from the current
as business activity and online behaviour, making data, highlighting both the opportunities and
loans accessible even for MSMEs lacking formal challenges for ensuring an inclusive and resilient
credit histories. Reports project that digital lending MSME financing environment.
will grow at a 22% Compound Annual Growth Rate
(CAGR), reaching $1.3 trillion by 2030, highlighting 5.12.1. Key Lessons in MSME Financing in India
its transformative role in India’s financial ecosystem. 1. Differential Impact Across MSME Categories:
As India advances towards a more integrated Larger MSMEs with established credit histories
economy, digital lending promises to further find it easier to secure credit, whereas smaller,
transform MSME financing. AI-powered platforms newer businesses face more challenges due
are expanding access to capital and creating a to perceived risks and limited collateral. A
financially inclusive ecosystem. This evolution in segmented financing approach tailored to
lending signifies more than a shift in finance; it marks different MSME categories is essential to ensure
a fundamental change in empowering MSMEs, balanced development.
driving national growth, and positioning them as 2. Shift Toward Larger Loans and High-Value
critical players in India’s economic landscape. Clients: PVBs are increasingly focusing on
high-value loans for stable clients, risking the
5.12. DISCUSSION exclusion of smaller MSMEs. A diversified
The current landscape of MSME financing in India strategy is needed to balance profitability with
is a complex blend of evolving financial practices, financial inclusivity.
strategic banking adjustments, and emerging 3. Importance of Diversified Lending Strategies:
technological solutions. The data analysis indicates MSME financing requires innovative,
that while the sector demonstrates resilience and customised solutions. Advanced risk assessment
recovery, especially post-pandemic, a distinct shift tools and specialised products can support
toward high-value lending by PVBs is noticeable. This smaller enterprises without compromising bank
trend may leave smaller MSMEs at a disadvantage, asset quality.
particularly those struggling to meet increasingly 4. Role of NBFCs and FinTech in Expanding
stringent lending requirements. The reduced focus Financial Access: NBFCs and FinTech platforms
on smaller enterprises threatens the inclusivity are filling gaps for smaller MSMEs by offering
of the MSME sector, which plays a vital role in faster, often collateral-free loans, which are
employment and economic diversity. Given these particularly beneficial for those in underserved
challenges, the discussion emphasises the need for sectors.
balanced support and targeted policy interventions 5. Improvement in Asset Quality Reflects
to ensure that smaller MSMEs are not left behind in Economic Resilience: Improved MSME
the push for financial stability and growth. The rise of asset quality post-pandemic indicates sector
alternative financing options, including NBFCs and resilience. Continued support for sustainable
FinTech companies, signals a transformation within financial practices will be crucial for lasting
the MSME financial ecosystem. These institutions, recovery.
with their agility and technological innovations, are 6. Need for a Centralised Data Dashboard for
filling critical gaps left by traditional banks, offering MSME Financing: A centralised RBI-managed
smaller MSMEs viable pathways to credit. Further, dashboard could streamline MSME financing
 MSME Financing in India: Driving Inclusive Growth and Economic Resilience 21

data, enabling precise, data-driven policy and often rely on costly informal credit. Offering
lending decisions. affordable alternatives within the formal sector
7. Policy Focus on Inclusivity and Sustainable is necessary to break cycles of debt and enable
Growth: Policies should focus on ensuring growth.
access to credit for smaller MSMEs, while 13. Impact of Udyam Registration on MSME
supporting sustainable, long-term growth across Formalisation: Udyam Registration has
the sector through entrepreneurship and skill increased MSME formalisation, improving
development initiatives. credit access. Policymakers should address
8. Opportunity for MSMEs to Enhance Global compliance challenges to maximise benefits.
Competitiveness: Improved credit access can 14. TReDS as a Solution for MSME Liquidity Needs:
enable MSMEs to compete internationally, TReDS addresses liquidity needs by quickly
helping them contribute to India’s economic converting receivables into cash, supporting
growth in global markets. financial stability, especially for smaller MSMEs.
9. Leveraging AI and Data Analytics for Effective 15. Importance of Collaboration Among
Risk Management: AI and data analytics can Stakeholders: Collaboration between banks,
transform MSME financing by allowing precise regulators, and MSME associations can refine
credit risk assessments and better resource financing policies, close credit gaps, and support
allocation. sustainable lending practices.
10. Specialised Regulatory Framework for Digital
Lending and FinTech: A tailored regulatory Overall, the complex MSME financing landscape
framework for digital lenders and FinTech firms in India faces challenges as banks prioritise larger
will promote transparency and ensure market loans, potentially marginalising smaller enterprises.
stability, benefiting MSMEs. However, digital lending, FinTech platforms, and
11. Sustaining the Role of PSBs in Financial initiatives like Udyam Registration and TReDS show
Inclusion: PSBs are crucial for smaller MSMEs’ a positive shift towards broader access. What is really
access to credit, and supporting their inclusion- needed is a balanced, inclusive financing approach that
focused approach is essential for fostering combines digital tools, targeted policies, and regulatory
financial stability across the sector. oversight, ensuring MSMEs remain integral to India’s
12. High-Cost Credit and Informal Lending as economic growth, employment, and innovation. Such
Barriers to MSME Growth: Smaller MSMEs an ecosystem is clearly in the making.

ENDNOTES vi See ‘PMMY Bank Wise Performance 2018-19,

2019-20, 2020-21, 2021-22, 2022-23 and 2023-
i See NITI Aayog, (November, 2023), ‘Impact 24’, https://www.mudra.org.in/
Assessment of Pradhan Mantri Mudra Yojana
vii See ‘PMMY Bank Wise Performance 2018-19,
(PMMY)’, https://www.niti.gov.in/sites/default/
2019-20, 2020-21, 2021-22, 2022-23 and 2023-
files/2024-08/Assessment%20of%20PMMY_
24’, https://www.mudra.org.in/
Final%20Report.pdf
viii The SIDBI and MUDRA Annual Reports
ii See, ‘Strengthening Credit Flows to
for 2023-24 are not yet available as on 14th
the MSME Sector’, https://prsindia.
November 2024.
org/policy/report-summaries/
strengthening-credit-flows-to-the-msme-sector ix See https://www.sidbi.in/jocata-sumpoorn
iii 2023-24 (As at end-December 2023). RBI says x RBI, ‘Report on Trend and Progress of Banking
that the data are provisional. in India 2021-22’, https://rbi.org.in/Scripts/
AnnualPublications.aspx?head=Trend%20
iv The values in concerned table in the RBI Annual
and%20Progress%20of%20B anking%20
Report 2019-20 do not add up to the totals
in%20India and RBI, ‘Report on Trend and
given there in. The same has been corrected and
Progress of Banking in India 2022-23’, https://
used here.
rbi.org.in/S cr ipts/Annua lPublicat ions.
v See RBI, ‘Report on Trend and Progress of aspx?head=Trend%20and%20Progress%20
Banking in India, 2021-22, and 2018-19’, of%20Banking%20in%20India
https://rbi.org.in/Scripts/AnnualPublications.
aspx?head=Trend%20and%20Progress%20
of%20Banking%20in%20India