For decades, India’s MSME frameworks have centred around schemes, incentives, and registration-linked benefits. But the foundational assumption remains flawed: that structure must precede support, and that eligibility can be determined by documentation.
If India is to truly become a “Viksit Bharat,” we must rewire our systems, not just expand them. (Source: AI Image)
While the contribution of India’s micro, small and medium enterprises to employment, exports, and economic resilience remains vast, behind the celebratory numbers lies an uncomfortable truth: most MSMEs remain outside the reach of formal finance.
Roughly 90% of micro and small enterprises in India do not have access to formal credit. This is not due to a lack of entrepreneurial activity or even capital supply. It’s a trust gap, rooted in how we define eligibility and participation.
For decades, India’s MSME frameworks have centred around schemes, incentives, and registration-linked benefits. But the foundational assumption remains flawed: that structure must precede support, and that eligibility can be determined by documentation. This mindset leaves the majority of MSMEs outside the purview of meaningful financial access, especially those operating informally yet vibrantly within the economy.
Our systems continue to prioritise compliance before confidence. Registration, tax filings, and collateral are treated as the gatekeepers of credit and support. But in reality, most MSMEs don’t begin with systems. They evolve into them. And by making support contingent on formality, we exclude the very businesses that most need to be included.
The problem is not the MSMEs. The problem is the rigidity of our approach, which is top-down, standardised, and compliance-led. India’s informal economy thrives on agility, not on filings. When policy designs ignore this reality, even well-funded interventions fail to reach their target.
Inclusion by Design, Not by Exception
If we want to build an inclusive financial system for the real economy, we need to shift our assumptions. MSMEs don’t operate on quarterly forecasts, they operate on weekly working capital cycles, informal credit arrangements, and seasonal sales. Traditional underwriting doesn’t fail here because businesses are risky; it fails because the system is misaligned.
We must move from asking MSMEs to adapt to the system to building systems that adapt to MSMEs. This includes using alternate data, trade-based cash flow signals, and deep partnerships across supply chains. But more than tools, this requires a mindset shift: trust must become the default, not the reward.
Nowhere is this shift more urgent than in closing the gender gap. Nearly 40% of MSMEs are officially recorded as “owned” by women but only ~20% are actively run by them, and their contribution to turnover stands at just 12.7%. In many cases, names are added for compliance, while decision-making remains elsewhere. Ownership is not inclusion. Visibility, access, and authority are. And until policies account for the real barriers, from market access to creditworthiness, we will keep missing a large portion of India’s entrepreneurial potential.
Three Shifts India Must Make:
1. From fragmented interventions to integrated business systems
MSMEs need more than capital. They need finance embedded into inventory, billing, payment, and digital tools. Finance must be part of the business system, not just a top-up.
2. From one-size-fits-all schemes to segmented, data-led delivery
A micro-trader in Manipur and a textile seller in Tamil Nadu live vastly different realities. Policy needs to shift from productization to cohort-led enablement, with sharper data strategies that allow localised design.
3. From documentation-based eligibility to trust-based inclusion
Trust is already being demonstrated in timely repayments, supplier networks, and long-standing trade behaviours. Let’s build policies that reflect this, not reject it. Formality should be an outcome, not a precondition.
From Anecdote to Architecture
MSME innovation has shown sparks, especially through fintech-led credit models that embed finance into supply chains and unlock capital for underserved businesses. But we cannot rely on anecdotes alone. Scaling impact requires moving from individual stories to system-level readiness.
India’s MSME credit penetration remains at just 14%, compared to over 50% in the US, despite the sector’s outsized economic contribution. Credit guarantee schemes exist, but awareness is low. Skilling programs are launched, but uptake remains below 1% nationally. This is not a failure of intent, it is a failure of integration.
The Way Forward
If India is to truly become a “Viksit Bharat,” we must rewire our systems, not just expand them. The future of MSME growth lies in convergence: of policy and product, finance and design, grassroots insight and national vision.
The opportunity is not just to serve small businesses but to build with them. Because the next chapter of India’s growth will not be built in boardrooms. It will be built in mandis, main streets, and markets, by entrepreneurs who are not waiting to be saved. They are waiting to be trusted.
Pallavi Shrivastava is the Co-founder of Progcap.
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