MSMEs: From survival to scale

To grow, micro, small and medium enterprises need finance that aligns with cash flows

India’s micro, small and medium enterprises (MSMEs) are central to the country’s economic journey. They create jobs, nurture entrepreneurship, support larger industries, and spread economic activity far beyond major urban centres. Indeed, for many first-generation entrepreneurs, the MSME route is the most practical path into formal economic participation.

 

Yet, even as their importance for inclusive growth is widely acknowledged, a familiar concern persists. MSMEs remain small and vulnerable to shocks due to a lack of appropriate finance.

 

The next phase, therefore, must be about more than just expanding credit. It must be about building a financial ecosystem that serves MSMEs through timely, transparent and appropriately structured financing solutions.

 

 

The missing middle

 

In many advanced, export-oriented economies, mid-sized firms act as a bridge between small local businesses and large corporations. They often anchor supply chains, absorb labour more productively, and contribute to exports.

 

In India, by contrast, the enterprise landscape is far more skewed. There is a very large concentration of micro units, a modest layer of small firms, and only a thin segment of medium enterprises. The result is a hollowed-out middle in the growth ladder.

 

Why scaling up is hard

 

Scaling up is often the hardest stage in an enterprise’s journey. At the micro end, businesses may survive on informal finance, family savings, or small-ticket credit. At the other end, larger and more established firms can access formal bank finance and capital markets more easily. But firms in the middle often fall into a gap. Their financial needs outgrow family or informal sources, even as they remain thin on paper for conventional lending models. Consequently, many enterprises survive, but only a few scale up.

 

Finance that fits the business

 

An important reason is that formal finance often fails to fully recognise the realities of MSMEs: Thin margins, limited collateral, and uncertain operating cycles.

 

A business may be commercially viable yet appear riskier than it actually is because its strengths may not be fully visible through conventional financial statements. The need, therefore, is not only for more finance, but for more timely and better-designed finance, and appraisal systems that are more sensitive to actual business cash flows.

 

Formalisation brings visibility

 

In any well-functioning financial system, better information leads to better credit decisions. The more visible and credible an enterprise becomes, the easier it is for lenders to assess its repayment capacity and growth potential. In that sense, formalisation is about gaining access to the benefits of the financing ecosystem.

 

Small and medium enterprises, therefore, should look to strengthen their financial discipline and disclosures. Digitalisation can reinforce this process. As more MSMEs adopt digital payments, online accounting tools, better tax compliance and formal business channels, the resultant digital footprint can help reduce information asymmetry. This opens the door to more cash-flow-based appraisal and a gradual shift away from overreliance on fixed collateral.

 

Technology-led solutions like Unified Lending Interface (ULI) can reduce friction, shorten turnaround times, and improve access. The objective must be to make finance more informed, more transparent, and better suited to borrowers’ needs. MSMEs should be able to understand borrowing terms and assess costs clearly with products aligned to their needs.

 

The burden of delayed payments

 

Another obstacle that often weakens MSMEs’ financial position is delayed payments. In a healthy business ecosystem, firms should be able to convert sales into cash within a reasonable period and recycle that liquidity into fresh production, wages, and investment.

 

For many MSMEs in India, this cycle is frequently disrupted. Payments from larger buyers are often delayed, locking up working capital and straining otherwise viable enterprises. The problem is especially acute for smaller firms with limited liquidity buffers and bargaining power.

 

For a small business, payment delays can be the difference between stability and fragility. Mechanisms such as TReDS (Trade Receivables Discounting System) can help convert receivables into liquidity and reduce dependence on costly stop-gap funding. However, wider gains will accrue only if more buyers, more MSMEs, and more financiers actively use the platform.

 

Extend and pretend will do no good

 

An often-heard suggestion is to extend non-performing asset (NPA) recognition to 180 days. This may appear borrower-friendly at first glance, but it will merely shift the point at which stress is formally recognised.

 

If the lender has not properly factored in the enterprise’s operating cycle and elongated payments, postponing NPA recognition does not cure that underlying weakness. It may instead delay corrective action, allowing stress to deepen before it can be addressed.

 

The better approach is to align repayment schedules with actual cash flows and ensure an early, empathetic response when stress begins to emerge. Regulatory forbearance in recognition norms should remain a last resort, justified only in truly exceptional situations such as the Covid-19 pandemic.

 

A shared responsibility

 

The task of strengthening MSME finance does not rest on a single player. A stronger ecosystem is built collectively through borrowers’ preparedness, lenders’ conduct, and a supportive policy environment.

 

Banks now understand MSME business models and vulnerabilities better.  Sensitivity to viable business realities, especially in the face of temporary stress, can coexist alongside sound credit discipline.

 

MSMEs, too, have an important role in building lenders’ confidence. Maintaining accurate and reliable records, borrowing prudently, adopting digital systems, and maintaining repayment discipline are all part of becoming stronger participants in the formal financial system.

 

From local to global

 

The larger objective is not merely to keep MSMEs afloat, but to help them grow into stronger, more productive, and more competitive enterprises. As they grow, they need support in areas such as invoice discounting, trade finance, foreign exchange services, and risk management through a financial ecosystem that understands and caters to their needs. Such an ecosystem will help more enterprises move from survival to scale, and from local participation to global competitiveness. That would not only strengthen the MSME sector, but also support India’s progress towards Viksit Bharat.

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The author is Deputy Governor, Reserve Bank of India. The views are personal