As Credit Opens Up, India’s MSMEs Step Confidently Into the Formal Economy

For decades, India’s micro, small and medium enterprises (MSMEs) have been described as the backbone of the economy — quietly generating jobs, powering local markets and sustaining livelihoods across towns and districts. Yet, access to timely and affordable credit has often remained their biggest challenge.

That story, however, is beginning to change.

India’s small business credit ecosystem is witnessing a clear shift — one marked by rising formalisation, deeper lender confidence and expanding access to finance — according to the second edition of the CRIF–SIDBI Small Business Spotlight Report (December 2025) released by CRIF High Mark in collaboration with SIDBI.

The report, which tracks small businesses with credit exposure of up to ₹5 crore, paints a picture of a sector that is no longer just surviving on the fringes of the formal economy, but steadily integrating into it.

Credit growth picks up pace

The numbers tell a compelling story.

Aggregate small business credit exposure in India has climbed to ₹46 lakh crore, registering a robust 16.2% year-on-year growth. The number of active loan accounts has also expanded sharply, rising 11.8% to 7.3 crore accounts, underlining sustained demand for credit among MSMEs.

This momentum, the report notes, is being supported by a combination of policy interventions, government-backed credit schemes and improved risk assessment by lenders — a crucial mix that has helped maintain credit flow even amid broader economic uncertainty.

More importantly, this growth is not restricted to large urban centres. Credit is gradually spreading deeper into smaller towns and districts, signalling wider participation in the formal credit system.

Sole proprietors remain the backbone

At the heart of India’s MSME credit story lies the sole proprietor — small shop owners, traders, service providers and entrepreneurs who often run their businesses single-handedly.

According to the report, sole proprietors account for around 80% of total MSME credit exposure and nearly 90% of borrowers, reinforcing their central role in the ecosystem.

Interestingly, the fastest-growing borrower segment is sole proprietors who have both individual and enterprise credit exposure, which expanded 20% year-on-year. This growth is being driven largely by loans against property, indicating rising asset ownership and increased lender confidence in this category.

Formalisation is also gaining ground. As of September 2025, nearly 23.3% of borrowers were new to credit, while 12% were first-time enterprise borrowers. This steady onboarding of new borrowers highlights how MSMEs are gradually moving away from informal lending channels towards regulated financial institutions.

Banks and NBFCs widen their reach

Traditional lenders continue to play a major role, but the lending landscape is becoming more diversified.

Private sector banks remain the largest contributors to enterprise lending, closely followed by public sector banks, which continue to anchor credit distribution across states and districts.

At the same time, NBFCs are rapidly strengthening their presence, particularly among sole proprietors. NBFCs now account for over 41% of lending in this segment, helping bridge long-standing gaps in credit access for underserved and informal businesses.

This expanding lender mix is improving competition, product innovation and last-mile reach — all critical for MSMEs operating outside metro cities.

Loan mix reflects real business needs

The nature of MSME borrowing offers insight into how small businesses operate on the ground.

For enterprises, working capital loans dominate, accounting for nearly 57% of outstanding credit, underscoring the importance of liquidity for daily operations, inventory management and cash flow stability. Term loans continue to support longer-term capital expenditure and expansion plans.

Among sole proprietors, loans against property form the largest share, followed by business loans and commercial vehicle financing. These trends reflect the dual personal–business nature of many MSMEs in India.

One notable development is the sharp rise in unsecured lending, which grew 31% year-on-year. While this growth has raised some concerns around portfolio stress, the report suggests that improved underwriting practices and better data availability have helped lenders manage risks more effectively.

MSME credit spreads beyond major hubs

Geographically, traditional industrial and commercial hubs continue to lead.

Maharashtra, Tamil Nadu, Uttar Pradesh and Gujarat account for the largest share of MSME credit exposure. However, states such as Telangana, Andhra Pradesh and West Bengal are emerging as strong growth markets.

Crucially, the report highlights growing credit penetration beyond the top 100 locations, particularly in Uttar Pradesh, Madhya Pradesh, Karnataka and Tamil Nadu. This trend points to expanding financial inclusion in smaller cities and districts, where MSMEs often struggle most to access formal finance.

Sectorally, manufacturing continues to command the highest absolute credit exposure. At the same time, the services sector recorded a sharp 19.6% year-on-year growth, reflecting diversification in MSME activity across logistics, trade, professional services and digital businesses.

Asset quality improves, boosting confidence

Perhaps the most encouraging signal for lenders is the improvement in portfolio quality.

Loans overdue by 91–180 days declined to around 1.4% as of September 2025, compared with 1.7% in September 2023. Enterprises continue to exhibit relatively lower risk profiles, while sole proprietors have also shown steady improvement.

The share of very low- and low-risk borrowers has increased, supported by better underwriting standards and wider use of digital and alternative data. This improvement in asset quality is strengthening lender confidence and creating room for further credit expansion.

Odisha stands out as a high-growth state

The report places special focus on Odisha, which has emerged as one of India’s high-growth MSME states.

Small business credit in Odisha grew from ₹0.67 lakh crore in September 2023 to ₹0.96 lakh crore in September 2025, marking a 17.2% year-on-year growth, well above the national average.

Growth has been particularly strong in aspirational districts, where credit expansion exceeded 22%, accompanied by improving delinquency trends. Public sector banks continue to dominate the state with over 40% market share, while NBFCs are rapidly expanding into under-penetrated regions.

Notably, the share of very low-risk small enterprises in Odisha rose from 40.1% to 47.1% over the two-year period, opening up new lending opportunities and reinforcing the state’s potential as an MSME growth engine.

Industry perspective: formalisation and credit deepening go hand in hand

Commenting on the findings, Sachin Seth, Chairman, CRIF High Mark and Regional Managing Director, CRIF India and South Asia, said the data reflects a maturing credit ecosystem.

“Sole proprietors continue to anchor India’s small business credit ecosystem, accounting for close to 80% of the borrower base as of September 2025. At the same time, borrowers with both individual and enterprise credit presence are contributing a steadily rising share of overall credit exposure. These trends indicate that credit deepening and gradual formalisation are progressing in parallel as small businesses scale.”

Taken together, the CRIF–SIDBI report reinforces a growing sense of optimism around India’s MSME sector. Rising credit access, improving risk profiles, broader geographic spread and increasing participation of new borrowers suggest that the foundations of small business finance are becoming stronger.

For lenders, it opens up new opportunities to serve a wider and more diverse MSME base. For entrepreneurs, especially those in smaller towns and districts, it signals better access to capital — a critical ingredient for growth, resilience and long-term sustainability.

As India’s startup and small business ecosystem evolves, the steady formalisation of MSMEs could prove to be one of the most significant drivers of inclusive economic growth in the years ahead.