Credit is key for MSMEs

India recorded 7.7 million MSME (Micro, Small, and Medium Enterprises) registrations by the first week of February 2026. With this, India became world’s largest MSME country surpassing Indonesia and China. MSMEs comprise 90% of total businesses in the world. They provide 60% of total employment and contribute 50% of global GDP (Gross Domestic Product). MSMEs in India contribute 40% of total employment and 30% to GDP (Gross Domestic Product). While MSMEs in India contribute 45% of total exports, only 10% are direct exports.

Major volume is exported through front-end merchants or through large industries which procure from MSMEs. Items that used to be the core for MSMEs and having decent profit margins saw entry of large industries. In a short time, large industries became dominant players and marginalized MSMEs in the lucrative items. Examples include garments, salt, automobile components, footwear, spices, food processing, leather goods, and several fast moving consumer goods (FMCG).

MSMEs are left with items of low margin, low volume, sporadic, or non-automatable. Still, about 35% of total materials of large industries in India are supplied by MSMEs. On the other side, there are several items which are systemically impossible for large industries to manufacture. In fact, many items lose competitiveness if large industries were to manufacture them. A recent finding by RBI (Reserve Bank of India) listed top three challenges of MSMEs as lack of access to adequate credit, high competition, and lower adoption of technology. 

The other listed challenges are inadequate availability of raw materials, labor, and infra, delayed payments, regulatory compliance, technology adoption, and utilities. The major reason for MSMEs not being able to scale up business is non availability of adequate credit. This long persisting issue has two main facets. One, lenders are usually cautious with MSMEs due to higher costs in administering credit to MSMEs, Non Performing Asset (NPA) risks, lower loan ticket sizes, business discontinuity practices of MSMEs, and opaque capital structures of MSMEs.

Two, MSMEs do not have proper credit practices. They lack timely repayment, have excessive borrowings, mix business and family borrowings, operate in noncorporate formats, slow in employing technology, and hardly adopt enterprise resource planning. MSMEs which can withstand high credit costs, pricing pressures, and exploitative practices of certain large industries are only able to survive. MSMEs can overcome the credit challenges to a significant extent by improving their credit discipline, business practices, upgrading to corporate format, and by adopting corporate governance.

Government should enhance its support to MSMEs. GST (Goods and Services Tax) should be further simplified for MSMEs. Considering the multiplier effect of MSMEs contributions, income tax for MSMEs should be substantially reduced. Since 90% of MSME exports are indirect, export facilitation funds should be established to encourage direct exports by MSMEs. TReDS platform should be further improvised. Cluster Credit products should be promoted.

Direct MSME Banks should be established. SIDBI which is the only dedicated small industries lender in India, has only 8% direct funding and 92% is refinancing of other lenders’ MSME loans. Thailand, Malaysia, China, Brazil, and South Africa have direct SME banks. In Indonesia where 97% of businesses are MSMEs, almost all banks specialize in SME funding. Since the challenges faced by MSMEs in scaling up include complexities in organizational structure, S-Corp business formats, like those in USA, should be introduced which facilitates corporatisation of MSMEs to raise funds.

This format may even influence MSMEs to grow beyond MSME categories. India has huge stakes in MSMEs. Large industries, millions of employees, many vendors, and lenders are dependent on the sustainable survival of MSMEs. Therefore, a coordinated approach among MSMEs, large industries, government, and lenders is required to address the key issue of credit for the MSMEs.

- Dr Kishore Nuthalapati The author is CFO of BEKEM Infra Projects Pvt Ltd