India's INR 80 Lakh Crore Credit Problem For MSMEs Formal lending is growing, but not fast enough to meet the surging credit appetite of India's MSMEs, and the cost of this gap is more than just lost opportunity.

Despite the significance of India's micro, small, and medium enterprises (MSMEs) contributing nearly 30 per cent to GDP and providing employment to over 110 million people, they remain locked out of mainstream finance. The recent report by NITI Aayog in collaboration with the Institute for Competitiveness (IFC) lays bare a troubling reality: India's MSMEs are growing, but the credit system meant to fuel this growth is still playing catch-up.

The report, "Enhancing Competitiveness of MSMEs in India", points to a "notable improvement" in formal credit access over the past four years. Between 2020 and 2024, the share of micro and small enterprises accessing credit from scheduled banks climbed from 14 per cent to 20 per cent. Medium enterprises saw their numbers more than double, from 4 per cent to 9 per cent. Yet, these gains pale in comparison to the size of the problem. By FY21, only 19 per cent of the total MSME credit demand was being met formally. The rest, an estimated INR 80 lakh crore, was filled by informal sources, often at predatory rates ranging from 30 per cent to 60 per cent annually.

Sidharth Diwan, partner - financial services, PwC India, echoes this concern, stating, "India's MSME sector, contributing 30 per cent of GDP and employing over 110 million people, remains pivotal to achieving inclusive growth, yet a staggering INR 80 lakh crore credit gap stifles its potential." He emphasizes the need to democratise credit access through AI and alternate data like GSTN and UPI flows, noting that digital lending platforms can now approve 50 per cent of MSME loans within 48 hours, yet only 20 per cent of micro-enterprises access formal credit. Diwan adds that expanding schemes like CGTMSE to underserved clusters and integrating banks, NBFCs, and fintechs into unified co-lending platforms can accelerate inclusive lending and job creation, particularly in rural India.

This is not just a financial shortfall, but a systemic failure. As per the report, Reserve Bank of India's data from Statements I and II, which consolidate information from 41 major scheduled commercial banks covering 95 per cent of all non-food credit, shows the problem in sharp relief. Even as credit growth in the MSME sector surged between September 2020 and 2024, the unmet demand only ballooned.

Santanu Agarwal, deputy MD, Paisalo Digital Limited, underlines the problem stating, "India's MSME ecosystem is a foundation of the economy… Still, an existing credit gap holds back its optimum growth. Plugging this gap necessitates a multi-pronged approach." Agarwal stresses the importance of bolstering collateral-free lending frameworks such as the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), and expanding the role of NBFCs that can cater to underserved geographies and customer profiles with more flexible underwriting.

Indeed, the CGTMSE has seen substantial growth. But the NITI Aayog report is clear; it's not enough. Structural limitations persist, and calls for an overhaul are growing louder. The fund, while necessary, needs to be more targeted, technologically integrated, and complemented by partnerships with fintechs and NBFCs to scale reach and efficiency.

That's a point echoed by Raja Debnath, chairman and CEO of Veefin Group, who warns that the credit gap "requires an integrated credit delivery system, stronger coordination between banks, FIs, and FinTechs, supported by digital public infrastructure, secure APIs, and standardised data frameworks." According to him, anchor-based supply chain finance and thin-file underwriting models can help bridge the existing chasm but only if banks, financial institutions, and fintechs work in sync.

Some are already leading by example. UGRO Capital's chief risk officer, Anuj Pandey, highlights how they're using alternative data sources, like GST filings and bank transaction histories, to assess borrowers who lack traditional documentation. Their proprietary GRO Score model has helped reduce turnaround times and improve loan quality. But Pandey also issues a sobering reminder saying, "Bridging the credit gap isn't just about access to funds, it's about building a sustainable framework that empowers MSMEs to become long-term engines of India's economic growth."

This sentiment is mirrored by Dhiraj Jha, CEO of Satin Finserv Limited, who sees financing not as a short-term fix, but a long-term growth strategy. "Without adequate and timely credit, their ability to expand, digitize, or even survive is severely constrained," Jha says. He advocates for alternative data models, last-mile partnerships, and customized loan products that match the working capital cycles of micro and small businesses.

Structural reform, however, also demands broader institutional support. Padmanand V, partner, Grant Thornton Bharat points to global best practices that India can adopt. From industry association-led lending assessments to state-level credit guarantee mechanisms, the solutions are not out of reach. He highlights Tamil Nadu's model as a potential template. "Even a five per cent increase in this contribution will facilitate realization of Viksit Bharat even earlier than 2047," he says, referencing India's development goals.