India’s micro, small, and medium enterprises continue to grapple with a chronic lack of reliable financing. The findings of a recent survey suggest that e-commerce integration could be a game-changer, particularly in unlocking access to external finance and collateral-free loans. The survey, conducted by New Delhi-based think tank ICRIER, found that 51% of MSMEs with an online presence reported improved access to funding from banks and non-banking financial companies.
The benefits of e-commerce are skewed in favour of small and medium enterprises. Micro-enterprises, which form the majority, continue to face structural disadvantages. For MSMEs not integrated with e-commerce platforms, the biggest hurdles remain access to markets and finance. These barriers severely constrain growth and competitiveness, particularly for micro firms.
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A deepening credit gap
India’s credit penetration in the MSME sector is just 14%, significantly lagging behind countries like China (37%) and the United States (50%). The gap is stark: a report by the parliamentary standing committee on finance estimates a shortfall of Rs 20-25 lakh crore, with nearly half of the credit demand from MSMEs unmet.
As of March 31, 2025, India had 6.19 crore registered MSMEs under the Udyam portal. Of these, a staggering 6.11 crore—over 99%—are micro enterprises. These tiny firms often lack the assets or formal documentation needed to qualify for loans, leaving them locked out of the traditional banking system.
Banks remain wary of lending to MSMEs due to their perceived high risk. Many lack sufficient credit history or fixed assets that can serve as collateral. According to the ICRIER report, in 2022–23, the average fixed assets of unincorporated, non-agricultural enterprises stood at Rs 3.18 lakh—dropping even further to Rs 2.15 lakh in the manufacturing segment.
Even well-intentioned policy interventions have had unintended consequences. For instance, Section 43B(h) of the Finance Act, 2023, which is designed to ensure timely payments to MSMEs, has deterred larger companies from doing business with them due to compliance concerns.
Unsecured loans remain out of reach for most MSMEs. As of March 2024, just 25% of the total credit disbursed by scheduled commercial banks went to MSMEs. Private banks, while more willing to lend, often charge prohibitively high interest rates due to the risk premium they associate with the sector.
When asked to identify their top challenges, a third of non-ecommerce-integrated firms surveyed cited limited market access and difficulty securing finance. Other recurring issues included customer retention, finding qualified staff, and inadequate marketing capabilities.
Policy intent vs ground realities
Despite an array of government initiatives including the Credit Guarantee Fund Trust for Micro and Small Enterprises, Pradhan Mantri Mudra Yojana, and collateral-free loans through scheduled commercial banks, more than half of the surveyed enterprises said they had not accessed any government schemes in the past three years.
The underlying problem remains unaddressed: traditional lenders are not equipped to meet the unique credit needs of MSMEs. Low credit ratings, informal operations, and non-standard loan requirements keep MSMEs outside the financial mainstream.
Digital solutions as a new frontier
Given that MSMEs contribute nearly a third to India’s GDP, employ 62% of the business-sector workforce, and account for nearly 46% of exports, the urgency of resolving their funding crisis cannot be overstated. Experts are calling for a digital-first approach to bridge the funding gap.
Digital lending, projected to surpass traditional lending by 2030, is emerging as a scalable solution. Leveraging technologies like artificial intelligence and machine learning, lenders can now create dynamic credit profiles based on revenue flows and transaction data, rather than relying solely on collateral.
With the number of MSMEs expected to rise from 6.3 crore to 7.5 crore in the coming years, building robust digital lending infrastructure is imperative. This calls for strong collaboration between fintech companies, traditional banks, regulators, and the government.
However, MSMEs must also do their part. Many still operate informally, without clear documentation or repayment records, making credit assessment nearly impossible. Formalising operations, maintaining proper books, and adopting digital payment systems will go a long way in improving creditworthiness.
The road ahead lies in building an inclusive, tech-enabled financial ecosystem. Innovations in financial data sharing, alternative credit scoring, and platform-based lending models offer a promising path forward. But for these to succeed at scale, government schemes must evolve in tandem with technological innovation, ensuring that policy frameworks enable rather than hinder progress.
India has made notable progress in expanding credit access in recent years. But to truly empower its vast MSME sector, it must now turn intention into execution—by embracing digital disruption and breaking down the longstanding barriers to finance.