The Deputy Governor of Reserve Bank of India (RBI), Swaminathan J, on Monday highlighted that despite the critical role of the MSME sector in the Indian economy, a common grouse is that they find it difficult to secure timely and adequate formal credit.
He highlighted the contribution of MSMEs in the Indian Economy, and said that with approximately 6.3 crore units, MSMEs contribute nearly a third of India’s nominal GDP and account for over 40% of the country’s exports.
The sector is also generating over 22 crore jobs and holding immense potential to harness India’s demographic dividend, he said.
What factors contribute to MSMEs’ credit challenge?
Swaminathan J highlighted challenges that the MSME sector faces while securing timely and adequate formal credit.
He said this challenge may be on account of factors such as information asymmetry on their financials and business viability, and also on account of limited formalization even today within the MSME sector.
“Many MSMEs lack comprehensive financial records or credit scores, and in some cases, they may not have sufficient collateral to support the scale of financing they require,” he said.
These issues result in a substantial gap between the credit needs of these units and the available supply—creating what is known as the credit gap, he said.
Five years ago, the Report of the Expert Committee on MSME (Chair: U.K. Sinha) constituted by RBI estimated this credit gap to be between ₹20 and ₹25 lakh crore, underscoring the pressing need to address the financial barriers that continue to constrain this vital sector.
How MSMEs can resolve the credit challenge?
The Deputy Governor said while regulatory policies and government schemes have played a crucial role in creating an enabling environment for MSMEs, it is equally important for MSMEs to take proactive steps to build trust and enhance their visibility with lenders.
1. MSMEs should prioritise formalisation
MSMEs operate informally, making it challenging for lenders to assess their creditworthiness.
By registering on the Udyam Portal and filing GST returns, MSMEs can enhance the transparency over their level of business activity and financials.
MSMEs should maintain comprehensive and accurate financial records which is essential for seeking credibility with lenders. They should adopt proper accounting practices.
He also suggested MSMEs to adopt digital payment systems like UPI and online banking as they create a digital footprint of financial transactions.
“Digital payments also improve cash flow management, offering MSMEs greater control over their finances and helping them maintain a clear financial record.”
2. Strive for greater credit discipline:
MSME should go for selection of the appropriate credit product suited to their requirements and cash flows.
“They should familiarise themselves with different credit products such as term loans, working capital loans, overdrafts, and invoice discounting to match them with their borrowing needs. It is vital to tailor borrowing to business cycles and avoid over-leveraging,” he said.
He highlighted that it is also important to use the bank funds for the purposes for which it was borrowed. Sometimes, however, it is noticed that working capital funds are diverted for other purposes.
3. Invest in capacity building:
MSMEs must invest in capacity building to strengthen their operational and financial management skills.
Financial literacy programs make entrepreneurs more confident borrowers while the skill development workshops on topics like compliance, bookkeeping, and market trends equip them to better manage their businesses and finances.
He also highlihgtd that fintech solutions that use alternative credit scoring based on sales patterns or supplier feedback can help MSMEs secure funding more effectively.
4. Prioritise use of TReDS:
Swaminathan J said the MSMEs should prioritise the use of TReDS. Pursuing buyers to also onboard onto TReDS ensures smoother transaction processing and timely payments.
By integrating TReDS into their operations, MSMEs can unlock liquidity, improve cash flows and build stronger trust with lenders, he said.
