Private sector banks have emerged as the main driver of micro, small and medium-sized enterprises (MSMEs) under the Priority Sector Lending (PSL) framework, with lending nearly tripling over the past five years. Total credit extended to MSME by private banks has skyrocketed from Rs 456 lakh in 2019 to Rs 1264 lakh in 2024.
Credit flow across the banking sector to MSME doubled in the same period, reaching Rs 210,000 in 2024 from 10.06 Larkcroix in 2019. In contrast, public sector banks (PSBs) recorded relatively moderate increases, with loans to MSMES recorded from £5.5 crore at 5.5 lua in 2019.
This trend highlights the aggressive expansion of private banks in the MSME credit segment, leveraging digital platforms, streamlined loan approvals and risk-based lending models that promote financial inclusion, said a banking industry observer.
Surge in loans in priority sectors
Total credit expenditures on priority sectors, including agriculture, MSME and social infrastructure, have witnessed an increase of 85% over the past six years. In 2019, the bank paid the priority sector Rs 23.01 crore, a figure that rose to Rs 42.73 crore in 2024.
MSME is an important component of the PSL framework, requiring the banks to assign certain portions of credit to the sector by the Reserve Bank of India (RBI). These measures will often allow small and medium-sized businesses not being served by traditional banking channels to access financial resources for expansion and sustainability.
Private banks outweigh public lenders
The rapid growth of MSME loans by private banks reflects changing bank dynamics. While PSB has traditionally been the leading lender for MSME, private banks have significantly expanded the footprint of this space by offering faster loan approvals, unsecured lending and customized financial products.
Industry experts attribute this growth to multiple factors.
(1) Digital lending innovation: Private banks have leveraged FinTech collaborations, online lending platforms and AI-driven credit valuations to improve loan processing times and expand access to MSMEs.
(2) Risk-based pricing model: Unlike traditional banks, which often rely on loans with high collateral, private banks have introduced alternative credit valuation methods to allow companies with limited financial history to access their funds.
(3) Government and RBI Support: Initiatives such as Mudra Loans, 59 minute PSB loans and the Emergency Credit Line Guarantee Scheme (ECLGS) have played an important role in expanding credit access, particularly in the wake of the Covid-19 pandemic.
The challenges of MSME lending
Despite the increased credit flow, MSME continues to face challenges in securing funding. Important hurdles include:
(1) Collateral requirements: Although sub-locals can use unsecured loans, many small and medium-sized businesses still struggle with strict collateral norms, especially in PSBs.
(2) High interest rates: Private sector banks often charge higher interest rates than PSBs, and small business loans are costly.
(3) Financial Document Barriers: Many MSMEs lack appropriate financial records that limit access to formal credit, particularly in the informal sector.
Future outlook and policy intervention
To close the credit gap in MSMES, the government and the RBI are implementing several reforms, including:
•Expanding credit guarantee schemes: Micro and Small Businesses (CGTMSE) credit guarantee fund trusts have been strengthened to provide greater unsecured credit options.
•MSME’s Digital Public Infrastructure: RBI is pushing for the recruitment of account aggregators to help small businesses improve financial reliability and secure loans more easily.
•Customized Credit Solutions: The introduction of cash flow-based lending models and risk-adjusted credit solutions is expected to further enhance MSME funding.
