The MSME Sector deserves better, inclusive support

Each year, June 27 is recognized as Micro, Small, and Medium Enterprises (MSME) Day. The United Nations General Assembly designated this date in April 2017, emphasizing the crucial role MSMEs play in global sustainable development and economic growth. MSMEs contribute approximately 35–45% of GDP in many countries, often surpassing 50% in OECD nations. Their multiplier effect can potentially lift society out of poverty.

It is a labor-intensive sector, especially in emerging economies, where it employs 60–70% of the workforce in countries across Africa, Asia, and Latin America. It plays a vital role in youth employment and women’s workforce participation, as they often offer more flexible and accessible opportunities than large firms.
MSMEs foster innovation but face scaling challenges due to resource limitations like finance, technology, and skills. The sector is quickly undergoing digital transformation—such as cloud services, e-commerce, and digital payments—that has increased MSME resilience and reach. Globally, many of these businesses remain unserved or underserved by banks and formal financial systems, primarily micro and startup ventures.

Multilateral organizations, such as the World Bank, IFC, UNIDO, and ILO, promote MSME growth through access-to-finance programs, digital support services, enterprise development planning, and market linkage support.

MSMEs in India:

There is a significant policy focus on revitalizing the MSME sector, but the benefits are not effectively reaching the intended groups. According to the Ministry of MSMEs’ Udyam portal, 4.68 crore registered MSMEs reported 20.19 crore jobs as of July 2024—an increase of 66% from 12.1 crore a year earlier. Most of these MSME units are GST registered, formalizing their status. When many unregistered MSME units are included, the total reaches 6.3 crores. Many of these are microenterprises that require substantial support, including digital and financial literacy. Their ability to withstand shocks remains fragile. Still, 2.32 crore jobs were created by informal micro-enterprises. A total of 4.54 crore women are employed in the sector. Therefore, it is a major engine of job creation in India. It helps reduce poverty and sustains the lives and livelihoods of millions.

A lack of sufficient credit flow to MSMEs presents a significant challenge. A Parliamentary Standing Committee report (April 2022) found that Rs 20–Rs 25 lakh crore of MSME credit demand remained unmet. Similarly, a Policy Circle analysis (2025) also confirmed that the credit shortfall totals Rs 20–Rs 25 lakh crore. Large companies that purchase from MSME units often delay payments, leading to disruptions in supply chains.

Institutional credit to MSMEs remains very low. The formal credit penetration for MSMEs is only 14%, compared to 37% in China and 50% in the U.S. The flow of credit to the manufacturing sector of MSMEs is significantly below demand, forcing units to seek informal credit, which carries high interest rates. A lack of sufficient and affordable credit hinders the ability of MSMEs to serve the economy fully.

Recent initiatives:

For decades after independence, many stakeholders have worked tirelessly together to strengthen the MSME sector. More importantly, after 2007, when the MSME Act was enacted, investment and turnover thresholds were increased to help growing enterprises retain MSME benefits while expanding, supporting technology adoption, and building capacity. The credit guarantee limit was raised from Rs 5 crore to Rs 10 crore for small and micro enterprises, unlocking an estimated Rs 1.5 lakh crore in additional credit over the next five years.

Eligible credit limits for start-ups have been increased from Rs. 10 crores to Rs. 20 crores, with a reduced 1% guarantee fee in 27 strategic sectors. The credit guarantee limit has also been extended to cover term loans of up to Rs. 20 crores for export-linked MSMEs. Micro enterprises are set to receive credit cards with a revolving limit of Rs. 5 lakhs through the Udyam portal. If they repay the amount, it can be replenished. The goal is to issue 10 lakh cards in the first year. This initiative can provide the flexibility to finance smaller enterprises and boost economic activity.

Another government scheme was introduced to support 5 lakh first-time entrepreneurs from women/SC/ST communities, offering term loans up to Rs 2 crores to them along with providing skill training in their chosen area.

The government has initiated the National Manufacturing Mission to strengthen MSMEs and their manufacturing abilities under the ‘Make in India’ initiative.

Over 20 MSME technology centres are planned to be set up nationwide with an investment of up to Rs. 200 crores to support automation, robotics, prototyping, and enhanced competitiveness.

It is also said that one of the purposes of the repo rate cut by 50 bps and CRR reduction by 100 bps (June 2025) could also be a stepping stone to direct higher credit toward different sectors, including MSMEs, and drive consumption-driven growth.

Already, banks are mandated to dedicate 7.5% of net bank credit to micro-enterprises. No collateral required for loans up to Rs 10 lakh to micro/small enterprises

The TReDS platform is already in use and is designed to enable secondary-market trading of MSME receivables, boosting liquidity. Unified Lending Interface (ULI), a digital lending app, is proposed to be launched to streamline the delivery of credit with frictionless digital data flows, similar to UPI. Once the enterprises go digital, ULI could help avail credit through the app.

RBI introduced structured credit rehabilitation for stressed MSMEs with loans up to Rs 25 crore, aiming to prevent NPAs. This will help maintain good asset quality of MSME units and preserve their creditworthiness. Credit Guarantee coverage is expanded from Rs 5 crore to Rs 10 crore with AI-driven risk assessments, reducing reliance on collateral. The Mudra loan cap (Tarun category) doubled to $20 for micro-enterprises, enhancing financial inclusion. The Udyam portal registers over 4.7 crore MSMEs, connecting them to government benefits.

The Champion’s portal has been introduced to address MSME issues through AI-powered grievance management. A specially designed PM Vishwakarma loan scheme was launched to provide artisans with Rs. 15,000 for toolkits, a daily stipend of Rs. 500, collateral-free loans at 5% interest, and marketing support under the Vocal for Local initiative.

Way forward:

These integrated steps under Make in India—ranging from easier finance and classification to tech-led infrastructure and policy support—aim to revive the MSME sector, transforming it into a globally competitive, inclusive, and digitally-driven powerhouse.
Despite a series of policy supports, the actual benefits are not reaching the MSME sector. Ease of doing business does not extend to them. MSME entrepreneurs are still starving for institutional credit; their support in technology, marketing, and export orientation remains inadequate.

AI support is currently being explored for MSMEs in India, including training tools, financing, and ecosystem assistance, with initiatives across government labs, tech centers, policy frameworks, and private partnerships. As these efforts grow, MSMEs are prepared to utilize AI for improved efficiency, growth, and resilience.

Banks must work closely with MSME associations and clubs to expand credit access and ensure that the newly designed schemes reach the target group of MSME units. Unless the MSME sector actively manufactures goods and adopts modern technology, its full growth potential can’t be realized. MSMEs should take the initiative to learn detailed methods for increasing productivity, thereby benefiting the economy.

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