Small-city micro, small, and medium enterprises (MSMEs) in India often navigate a challenging landscape, particularly when accessing crucial credit and dealing with infrastructural limitations. Despite these hurdles, these resilient businesses are demonstrating remarkable ingenuity and adaptability. The Financial Express reports that a substantial credit gap of $530 billion persists in the sector, with only 14% of MSMEs having access to formal credit, leaving 47% of credit demand unmet. Despite these challenges, small-city MSMEs are adopting innovative strategies and leveraging technological advancements to bridge these gaps.
Technological Advancements
Due to their limited collateral and absence of official financial records, small-city MSMEs are frequently excluded from traditional lending practices. Fintech companies are addressing this by using machine learning (ML) and artificial intelligence (AI) to evaluate creditworthiness using alternative data sources like transaction histories, bank statements, and GST filings. This method has greatly shortened loan processing times cutting the disbursal time from several days to less than six hours.
Government Programs: Improving Access to Credit
The Indian government has put in place several programs to increase credit availability in recognition of the vital role that MSMEs play:
The Credit Guarantee Program: With a guarantee of up to ₹1 billion per applicant, this program, which was introduced in the 2024–25 budget, enables MSMEs with a manufacturing focus to purchase machinery and equipment without the need for collateral.
MUDRA Loans: To make financing easier for microenterprises, startups, and small businesses, the Micro Units Development and Refinance Agency (MUDRA) offers loans up to ₹2 million.
Priority Sector Lending (PSL): The Reserve Bank of India mandates that 7.5% of banks’ adjusted net bank credit be allocated to micro-enterprises, ensuring a dedicated credit flow to this segment.
Infrastructure Challenges and Digital Solutions
Infrastructure deficits, including unreliable power supply, inadequate logistics, and limited internet connectivity, pose significant challenges for small-city MSMEs. However, the adoption of digital platforms is mitigating some of these issues.
Many new platforms facilitate invoice discounting, allowing MSMEs to access working capital by selling unpaid invoices at a discount. Moreover, the implementation of Digital Public Infrastructure (DPI) can potentially close up to 50% of the MSME credit gap in low and middle-income countries, including India, by easing credit access for an additional 16-19 million MSMEs.
The Path Forward
To further empower small-city MSMEs, a multi-faceted approach is essential:
Formalization: Encouraging MSMEs to register on platforms like the Udyam Portal and maintain accurate financial records can enhance their credibility and access to formal credit.
Digital Adoption: Encouraging online banking and digital payment systems can leave a digital trail that facilitates lenders’ evaluation of borrowers’ financial health.
Capacity Building: Investing in financial literacy and operational management training can equip MSMEs with the skills needed to navigate the financial ecosystem effectively.
By embracing these strategies, small-city MSMEs can overcome credit and infrastructure challenges, contributing significantly to India’s economic growth and resilience.