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The sector contributes nearly 45% to the manufacturing sector output and 40% to India's total exports.
Pallavi Shrivasatava, Co-founder of fintech company Progcap, says that the Budget 2025 must introduce measures like optimised taxation, targeted subsidies, and incentives for lending to underserved micro-enterprises in rural and semi-urban areas. Reducing borrowing costs for NBFCs and fostering a balanced, predictable regulatory framework are critical to scaling these efforts, she says.
“The recent National Credit Guarantee Scheme provides a guarantee cover of up to Rs 100 crore per borrower, which is a welcome step in the right direction. Additional measures, such as increasing credit guarantee coverage under CGTMSE, and expanding allocation for programmes like RAMP (Raising and Accelerating MSME Performance), can further enhance financial inclusion. However, empowering MSMEs requires going beyond finance – policies that resolve payment delays, promote digital transformation, and support skill development and market access are essential,” adds Shrivastava.
In the last Budget, FM Sitharaman introduced a new scheme to support MSMEs in the manufacturing sector. The new scheme allows MSMEs to access loans up to Rs 1 crore without collateral/third-party guarantees. Moreover, the FM announced that public sector banks would introduce a cutting-edge credit assessment model utilising digital footprint to evaluate the creditworthiness of MSMEs more accurately. Speaking at the National MSME Cluster Outreach Programme in Bengaluru in November 2024, Sitharaman said, "In this Budget (July), we have announced that banks will do the credit assessment within themselves. Each bank will have their own credit assessment model.”
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For context, a significant obstacle hindering MSMEs' access to credit is the sector's widespread informality. Many MSMEs, particularly those in tier II and III cities, rural areas, and semi-urban regions, remain uninformed about government schemes and financial assistance programmes designed to support them. The lack of formalisation results in insufficient credit histories and inadequate collateral, making MSMEs appear risky to lenders. Furthermore, stringent lending criteria, complex documentation processes, and a staggering 45% rejection rate for MSME loan proposals severely restrict their ability to secure loans.
According to experts, this new credit assessment model is a substantial upgrade from the traditional method, which relied solely on asset or turnover criteria to evaluate credit eligibility. A key advantage of this innovative approach is its ability to cover MSMEs that lack a formal accounting system, providing them with better access to credit facilities.
Gurjodhpal Singh, CEO of fintech company Tide India, says that things have changed significantly from last year, and there has been a surge in transformative solutions for MSMEs, enabling them to secure collateral-free financing. This includes an increased emphasis on collateral-free term loans to help MSMEs meet their long-term financing needs, adds Singh.
“The Government has significantly enhanced the Emergency Credit Line Guarantee Scheme (ECLGS) allocation, ensuring that MSMEs can access timely, collateral-free financing to navigate the post-pandemic recovery. Revisions to the ECLGS have allowed a larger base of MSMEs to benefit from much-needed financial support. This expansion has been particularly impactful for high-stress sectors such as hospitality and retail, which have faced prolonged challenges due to reduced demand and operational disruptions,” notes Singh.
Effective implementation is crucial
Stakeholders emphasise that the success of credit guarantee schemes hinges on their effective implementation, highlighting the need for efficient execution to reap the intended benefits.
“The new credit guarantee scheme will soon be presented in the Cabinet. While the exact details of the scheme are awaited, anticipation is high among stakeholders.This transformative approach is anticipated to improve liquidity and cash flow for MSMEs, particularly in tier II and tier II cities. However, effective implementation will be crucial. The banks will need to adapt their risk assessment models to accommodate this shift away from collateral-based lending, ensuring that smaller MSMEs can benefit from these opportunities without facing undue barriers,” notes Singh.
Similarly, Sundeep Mohindru, Founder and CEO of M1xchange, says that the credit guarantee scheme will provide more confidence to banks and, in turn, ease the credit sanction process. Furthermore, credit guarantee schemes expect that the support from insurance companies will enhance the credit sanction from banks.
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Pushkar Mukewar, Founder & CEO, Drip Capital, says that the policymakers,for the upcoming budget, should consider the evolving dynamics of domestic and global trade, which are at a pivotal crossroads. "As India's infrastructure sector continues to grow, leading to a more efficient supply chain ecosystem, it becomes increasingly important to ensure that the costs of key inputs remain competitive. Therefore, the budget should focus on rationalizing import duties on scrap metal, as rising input costs directly impact infrastructure development. Lowering these taxes will help reduce overall project costs and support the growth of critical infrastructure," he adds.
Similarly, Veefin Group, Raja Debnath, Chairman & Co-Founder, says the upcoming Union Budget presents a pivotal opportunity to address structural inefficiencies in working capital cycles for MSMEs.
"Today, over 80% of small businesses face cash flow challenges due to delayed receivables and limited access to formal credit. While initiatives like TReDS and GST reforms have improved transparency, we need sharper incentives for digital adoption among lenders and corporates. Policies that encourage deep-tier financing and integration of alternative credit data into underwriting frameworks can significantly bridge the $530 billion MSME credit gap. A targeted push towards tech-led digital lending for FIs here would not just unlock liquidity but also catalyze India’s vision of a $5 trillion economy," adds Debnath.
