India’s financial landscape is undergoing a remarkable transformation, especially for small businesses. Micro, Small, and Medium Enterprises (MSMEs) have emerged as the fastest-growing segment in bank lending, signaling a major shift in the country’s credit priorities. According to recent data from the Indian Brand Equity Foundation (IBEF) and the Economic Times, MSME credit has surged in FY25, outperforming sectors like retail and services.

By May 2025, credit to MSMEs grew by a strong 14.1% year-on-year, crossing ₹14.3 lakh crore. This accounts for a record 17.7% share of total bank lending — the highest ever. Clearly, financial institutions are paying closer attention to this critical segment, recognizing its role in inclusive growth and India's ambition of becoming a $5 trillion economy.

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Why Are MSMEs Getting More Credit?

A mix of policy, technology, and improved borrower behavior is driving this growth:

1. Better Asset Quality

Banks are reporting fewer bad loans from MSMEs, thanks to improved credit assessment tools. Digital systems now allow lenders to evaluate real-time data — like GST filings, payment patterns, and transaction history — leading to better lending decisions and fewer subprime borrowers. With more MSMEs repaying loans on time, lender confidence has grown.

2. Government-Backed Credit Guarantee Schemes

Initiatives like the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) and the Emergency Credit Line Guarantee Scheme (ECLGS) have been instrumental. These programs provide partial guarantees to lenders, reducing their exposure and encouraging them to finance smaller or riskier borrowers — especially those in rural areas or without traditional collateral.
This has opened doors for thousands of MSMEs that previously struggled to get credit due to risk concerns.

3. Rise of Digital Lending

Fintech platforms have disrupted traditional lending by making it faster, more accessible, and less dependent on paperwork. Instead of asking for physical documents or collateral, many digital lenders use data from UPI transactions, e-commerce history, and utility bill payments to evaluate borrowers.
This shift is especially beneficial for small businesses that need quick working capital or operate informally. It’s also reducing dependence on informal lenders in rural areas, promoting financial inclusion.

4. Co-Lending Partnerships

The co-lending model — where fintechs or NBFCs partner with banks — is gaining ground. In this setup, the fintech handles onboarding and credit checks, while the bank provides the capital. This allows for wider reach, especially in underserved areas, combining technology and financial strength to make credit more accessible and efficient.

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RBI’s Role in Simplifying Finance

The Reserve Bank of India (RBI) has also made key moves to boost financial access:

1. Simplified KYC Norms

To make formal banking more accessible, especially in rural regions, the RBI has eased KYC (Know Your Customer) requirements. This helps first-time borrowers and individuals without complete documents open bank accounts or access financial services.

2. Promoting BSBD Accounts

Basic Saving Bank Deposit (BSBD) accounts, promoted by the RBI, allow individuals to access formal banking with minimal paperwork. These accounts help build transaction history, which in turn supports better access to credit in the future.

3. Revised Microfinance Norms

In a progressive step, the RBI revised its definition of microfinance loans. Lenders like NBFC-MFIs can now offer loans for broader needs — like medical emergencies or education — rather than being restricted to business-only purposes. This change acknowledges the real financial challenges faced by low-income families and small entrepreneurs.

Challenges Still Exist

Despite progress, MSMEs face several ongoing hurdles:

• Collateral & Documentation: Many small businesses still struggle to meet traditional documentation or collateral requirements, especially those in informal sectors.
• Digital Divide: While fintech is growing, limited internet access and digital literacy, especially in remote areas, prevent some entrepreneurs from benefiting.
• Financial Literacy: Without proper understanding of interest rates, repayment schedules, or loan terms, many borrowers end up in debt cycles or misuse funds.
• Economic Pressure: Factors like inflation, global competition, and complex tax structures add stress to small business operations, potentially impacting repayment.

As a public sector bank official rightly pointed out:

“Access to finance is only one part of the equation. MSMEs also need sustained support in financial training, digital onboarding, and policy stability to thrive.”

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Startups: A Parallel Growth Story

Alongside MSMEs, India’s startup ecosystem continues to thrive. From AI-based startups to climate tech innovators, entrepreneurs across sectors are attracting investor attention

Importantly, funding is no longer concentrated in just Bengaluru, Mumbai, or Delhi. Tier 2 and 3 cities are seeing rising entrepreneurial activity, backed by micro-VCs, angel networks, and crowdfunding platforms. This diversification is helping democratize startup funding and enabling more talent to emerge nationwide.

Hybrid financing options like convertible notes and ISAFE instruments are also giving founders more flexibility in raising capital while protecting equity.

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Looking Ahead

India’s financial sector is at a turning point. With improved technology, government-backed support, and inclusive regulatory policies, MSMEs and startups are no longer on the sidelines — they’re now at the center of the country’s growth strategy.

Still, for this momentum to be sustainable, deeper reforms are needed. Key areas of focus include:

• Scaling up financial literacy programs.
• Bridging the rural-urban digital divide.
• Easing regulatory compliance for small businesses.
• Ensuring timely, affordable credit for both business and personal needs.

The outlook is promising. If this ecosystem continues to evolve thoughtfully, India could unlock the full potential of its entrepreneurs — and in doing so, accelerate toward long-term economic resilience and prosperity.