Sunil Bhau, as he is popularly called in the rural idyllic setting of Nashik, is a busy man. Shepherding and milking his farm of 50 goats, 20 buffaloes, five cows, a lone horse, and 4 dogs consumes most of his time and energy. Selling goat milk and spare cheese (only on some days) helps him put food on the table for his family. But some days of the month can be excruciatingly difficult – the vet charges and the fodder costs are unplanned expenses that Sunil Bhau has no way of planning.
From Indira Col to Indira Point, India has as many Sunil Bhausas as one can fit inside our census. Uplifting such entrepreneurs and their enterprises will add jobs, boost the output, and improve our economy. In fact, the American economy (about $30.33 trillion) has done well with its observation that every big business started small. In the words of Richard Branson, “Small businesses are the backbone of the economy, and their success is what contributes to America’s success”. The Chinese economy grew immensely from government policy based on similar thinking. The big question, thus, is how India can leverage its MSMEs.
Budget: A Tryst With The MSME
Budget announcements in India, needless to say, sport a great deal of enthusiasm, and any policy maneuvering during such announcements can uplift MSME activity. The recently announced Union Budget 2025-26, introduced several key reforms such as MSME classification criteria thereby ensuring more enterprises benefit from government schemes. It also enhanced credit availability through the Mutual Credit Guarantee Schemes. The announcements are also positive for the investments in digital and technology adoption and streamline compliance and regulatory reforms. Additionally, the introduction of a ₹10,000 crore startup fund and fintech-based credit solutions is a great attempt to spur MSME activity.
However, despite the government’s intentions and policies, there still remains a vast capital gap in the MSME sector majorly due to information asymmetry, high-perceived risk, and the preference for informal sources of lending among people like Sunil bhau. According to a finding by the UK Sinha Commission, 6.3 crore MSMEs were staring at a credit gap of ₹20 to 25 lakh crores.
The Government of India and RBI, have been actively supporting the MSME sector – it’s a sector that has the potential to create more jobs and boost economic output. While initiatives aimed at empowering MSMEs through reforms like Priority Sector Lending (PSL) and additional lending measures are essential, policies alone are not enough. It is crucial to complement these policies with last-mile credit solutions. Given that India has successfully established a network of entities for financial inclusion, it can apply a similar approach to enhance financial inclusion specifically for MSMEs.
Onboarding the New Indispensable Architects:
India has over 10,000 NBFCs spread across rural and semi-urban areas, playing a pivotal role in MSME financing. Unlike traditional banks, which often find small-ticket lending unviable, these institutions specialize in catering to micro and small entrepreneurs. With a deep local presence, they provide doorstep credit, bridging the gap between formal finance and grassroots enterprises. Their ability to assess creditworthiness beyond collateral-based metrics makes them a crucial part of the system.
NBFCs operate with flexible underwriting models, leveraging cash-flow-based assessments and relationship-driven lending. This is crucial as a majority of Indian MSMEs could still be lacking formal credit access. During the height of the pandemic, a UN report highlighted that nearly 80% of Indian MSMEs had no access to formal credit, forcing them to rely on unregulated sources. Such institutions have no alternative to bridge the gap and often end up relying on unsustainable sources. Moreover, limited access to affordable capital restricts the lending capacity of lenders. This issue can be resolved through targeted budgetary reforms. Enhancing liquidity positions and strengthening the regulatory framework can significantly improve credit penetration among underserved entrepreneurs.
How Do We Emulate Financial Inclusion in the MSME Space?
Financial literacy remains a fundamental barrier to deeper financial inclusion among MSMEs. Many micro and small entrepreneurs lack the knowledge to navigate formal credit channels, increasing their dependence on exploitative informal lenders. Government-backed financial education programs can address this by integrating credit awareness into skill development initiatives. Simultaneously, risk-mitigation tools like credit guarantee schemes and alternative credit scoring must be expanded to encourage lending to first-time borrowers.
Also Read | Why MSME Growth in India Needs Bold Execution?
Technology must be harnessed to streamline credit evaluation and disbursement. Digital lending platforms, AI-driven credit assessment, and blockchain-backed loan verification can enhance the credit flow. Fintech-NBFC partnerships will be key in creating a seamless, paperless financing ecosystem. The government must enhance regulatory clarity to boost investor confidence in alternative lenders. Strengthening co-lending frameworks, providing tax incentives, and increasing refinancing support can further solidify financial inclusion for MSMEs.
Empowering NBFCs is central to unlocking the full potential of reforms in the MSME-financing space. By reducing capital constraints, improving financial literacy, and embracing technology-driven credit models, alternative lenders can drive transformative change. A well-structured regulatory and policy ecosystem will ensure financial inclusion reaches the last-mile entrepreneur, fostering long-term economic growth.
Views Expressed By: Authored By Mayur Modi, Co-founder & Co-CEO, MONEYBOXX FINANCE LIMITED
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