Wheels are in motion for small businesses, but global challenges remain

Credit reforms and Budget incentives aim to strengthen the MSME sector but persistent payment delays and global tariff uncertainties remain hurdles, reports Raghu Mohan

“The measures in the Union Budget taken together position the MSME sector on a stronger footing today, making it more resilient and competitive than before,” says Binod Kumar, managing director (MD) and chief executive officer (CEO) of Indian Bank. It has been an eventful fortnight for micro-, small and medium enterprises, or MSMEs, which were flat-footed after the US tariff tantrums. But a raft of moves — easier credit and equity funding, higher growth thresholds, faster payments, sector-specific support, and inclusion-focused entrepreneurship schemes — have the potential to change the script. Even though the details of the tariff pacts with the US and European Union are awaited. 

The just-announced Budget builds on the steps taken in its previous edition for MSMEs: The move to lower the turnover threshold for buyers to ₹250 crore from ₹500 crore on the Trade Receivables Discounting System (TReDS), an invoice discounting platform. It brought in an additional 22 central public sector enterprises and 7,000 companies into play. On the credit side, banks were asked to accommodate MSMEs even if some of them were in the special mention account category for reasons beyond their control (this was to be supported through a guarantee from a government-promoted fund). Even though off-record, bankers were of the view that they would not like to run afoul of the supervisory staff of the Reserve Bank of India (RBI). What if such loans were to turn into non-performing assets? And given the forbearance nature of these decisions, they would wait for Mint Road’s guidance. Plus, the earlier revisions in TReDS guidelines (June 7, 2023) enabled insurance for financiers so that they could hedge against default risk, expanded the pool of financiers, and enabled secondary market for factoring units. (At a December 2024 meeting at the RBI, the issue of onboarding a million MSMEs onto TReDS was discussed) 

How does the plot look now? It appears that while the Budget is constructive for MSMEs, it will benefit the organised and medium enterprises through stronger credit and liquidity frameworks. The biggest credit gap lies in micro enterprises, which account for over 95 per cent of India’s 63 million MSMEs and yet face an estimated credit shortfall of over Rs 20 trillion. “Policy support can be sharpened by increasing credit-guarantee cover for micro enterprises to 90 per cent, and offering interest subvention linked to UPI-based turnover to reflect actual cash flows” is how Shachindra Nath, founder and MD of UGRO Capital, reads it. He believes that lower risk weights for micro loans and extending Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, rights to shadow banks for small-ticket secured lending would unlock capital and scale credit delivery. “Easing US tariff pressures is helpful, but domestic micro-credit reform will be the real growth driver.” 

 

The cross-border part in the small business story is still unfolding. “Tariff-related issues have certainly moved towards greater clarity in recent months, but I wouldn’t say they are fully settled yet,” feels Ketan Gaikwad, MD and CEO, Receivables Exchange of India (RXIL). For MSMEs, especially exporters, there are still areas where more consistency and predictability are required. “What is important is that the direction of policy is becoming clearer, but we will need continued engagement between industry and policymakers to ensure MSMEs can plan with confidence.” But TReDS has been a game-changer: A study by RXIL in partnership with the Indian Institute of Management Bangalore in May last year noted the presence of multiple financiers and the auctioning mechanism has reduced the interest burden (on buyers and sellers) on the platform. There has also been a considerable improvement in the participation of MSMEs with women entrepreneurs or senior women executives, with their share increasing to 7,406 companies (40 per cent) in FY25 from 14 firms (10 per cent) during FY18-24. 

As for export-side MSMEs, issues fester. “While recent tariff-related developments are positive and encouraging, it would be little premature to say that tariff issues are fully settled, particularly from the perspective of SME exporters,” says Ajay Sahai, director-general and CEO, the Federation of Indian Export Organisations. His point: The broad direction is reassuring — tariff rationalisation and moderation signal stronger intent to facilitate trade — but clarity, predictability, and product-level certainty are still essential for SMEs to plan investments, pricing, and long-term market strategies. For large exporters, the ability to absorb residual tariff uncertainty is relatively higher. They operate on thin margins, shorter credit cycles, and limited hedging capacity. What they need most is transparent timelines, stable duty structures, and clear communication, especially in labour-intensive and value-added segments. “Without this granularity, the full benefits of tariff easing may not translate evenly across the export ecosystem”. 

His suggestion: The focus must shift to total trade competitiveness, not tariff relief alone. By reducing logistics and compliance costs, particularly for first-time and small exporters; faster refunds and simpler procedures; targeted market access support, hand holding on standards, certifications, and buyer linkages; improved access to affordable export credit and insurance, aligned with SME risk profiles; and stronger integration into global and regional value chains, supported by free trade agreements and trade facilitation measures. 

For many exporters, the toughest part starts after the shipment goes out: Getting paid. “What should be a straightforward receipt often becomes a long trail of emails and follow-ups, especially for lean teams that can’t afford to chase every invoice,” points out Gaurav Shisodia, country manager and vice-president, Payoneer (India), a cross-border business and global payments platform. “TReDS can play a role but indirectly. It’s designed for invoice discounting in India, so it doesn’t collect money from an overseas buyer. What it can do for exporters is support the collections cycle by easing cash flow: once an invoice is clean and accepted, it can help unlock funds early while the actual cross-border collection continues through buyer-side payment methods”. 

It brings us to delayed payments for MSMEs. The latest Economic Survey has it that nearly ₹8.1 trillion is tied up, which has knockdown effects on working capital. “When an MSME files a delayed payment case against a buyer, it may strain or even damage the business relationship. Buyers may perceive the filing as an adversarial step and may stop placing new orders or discontinue the partnership altogether. Since MSMEs rely heavily on long-term commercial ties, the fear of losing future business prevents them from pursuing legal options, even when large dues remain pending,” the Survey said. It may be worth having another look at the “Report of the Expert Committee on MSMEs” (Chairman: U K Sinha, 2019). It held that most large firms deal with MSMEs on a credit basis and buyers do not honour invoices on time. MSMEs hesitate to file complaints against large buyers. In effect, buyers using MSMEs as a funding avenue: An alternative to banks. What few say on record is that while discounting systems such as TReDS are changing the game, more needs to be done. The Sinha committee even made a passing reference to the “naming and shaming” practice used in the United Kingdom and other European nations. 

For now, MSMEs are seeing light at the end of the tunnel.