Why MSMEs Struggle for Credit and Market Access? SIDBI Explains

The Small Industries Development Bank of India (SIDBI) has released an in-depth report titled "Understanding the Indian MSME Sector: Progress and Challenges", offering a comprehensive view of the current state of India’s Micro, Small, and Medium Enterprises (MSMEs). The report outlines critical insights on the sector's formalization, credit access, digital transformation, market challenges, and the growing role of women entrepreneurs.

The study is based on a wide-ranging survey of over 2,000 MSMEs across 19 industries, supported by secondary data and field-level insights. The findings reflect a sector that is growing rapidly but continues to face structural bottlenecks and emerging challenges that need policy and ecosystem attention.

Formalization Gathers Pace, Especially Among Micro Enterprises

The report notes significant progress in formalizing MSMEs, primarily due to the growing adoption of Udyam Registration and the Udyam Assist Portal. The number of registered MSMEs has seen a massive jump — from 2.5 crore in March 2024 to over 6.2 crore by March 2025. This move towards formalization is expected to open up access to credit, government schemes, and digital services, particularly for micro and small enterprises.

Credit Access Still a Major Challenge

Despite government efforts and policy frameworks to ease financing, credit access remains one of the most pressing issues for the sector. Informal borrowing is still prevalent, especially among micro enterprises, where 12% rely on unregulated credit channels. The figures drop to 3% and 2% for small and medium enterprises, respectively.

The report highlights that although credit supply has improved, a massive 24% credit gap still exists, estimated at nearly Rs 30 lakh crore. This gap is even higher in the services sector (27%) and among women-owned MSMEs (35%), underlining the need for more inclusive financial policies and tailored credit products.

Rise in Digital Lending and Payment Adoption

Encouragingly, the digital wave is making its mark. The report finds that 18% of MSMEs are now availing digital lending services, while a striking 90% have adopted digital payments, riding on the popularity of UPI and other digital platforms. This trend indicates a shift in financial behaviour, potentially enabling better credit profiling and access in the long term.

Women Entrepreneurs Gaining Ground, But Face More Barriers

Women-led enterprises now make up 26.2% of all proprietary MSMEs. While 76% of these businesses have some level of credit access, they continue to face disproportionate challenges. A significant 41% of women entrepreneurs identified credit access and market competition as their top concerns. The report stresses the need for gender-sensitive policies and dedicated financial instruments to empower women in the sector.

Market Access and Export Contribution

Traditional marketing continues to dominate MSME operations, with nearly 70% relying on conventional channels. This limits growth opportunities and restricts their ability to compete in modern, digitally-driven markets. Expanding the use of digital marketing tools and e-commerce platforms could play a pivotal role in scaling these businesses.

On the export front, MSMEs have shown improvement. Their contribution to India’s merchandise exports rose from 43.6% in FY23 to 45.7% in FY24. Exporting MSMEs are also more inclined towards adopting technology, although they continue to face obstacles such as supply chain disruptions, credit shortages, and fierce competition.

Labour and Infrastructure Bottlenecks

One-fourth of surveyed MSMEs reported a shortage of skilled manpower as a critical barrier. This is particularly true in sectors like defence manufacturing, garments, hospitality, tiles, and sanitaryware. The report underlines the importance of targeted skilling initiatives and stronger industry-academia linkages.

Infrastructure and slow technology adoption are also affecting MSME competitiveness. Sectors like auto components, logistics, and steel are particularly hit by poor physical and digital infrastructure, which hampers productivity and scale.

Green Transition Underway, But Needs Push

Sustainability is emerging as a focus area for Indian MSMEs. The report notes that 31% of MSMEs have adopted energy-efficient technologies, and 21% use renewable energy. However, 33% of respondents pointed to lack of awareness and technical know-how as barriers to wider adoption of green practices. SIDBI recommends that awareness campaigns, incentives, and green financing mechanisms be scaled up.

Policy Implications and Way Forward

The SIDBI report arrives at a crucial time when India is focusing on building an inclusive and resilient economy. With MSMEs accounting for nearly 30% of India’s GDP and employing over 11 crore people, strengthening this sector is key to achieving long-term economic goals.

The report makes it clear that while there are visible signs of progress, especially in formalization and digital adoption, challenges such as access to credit, skilled workforce, infrastructure, and gender gaps continue to hold the sector back. Focused policy attention, ecosystem collaboration, and innovative financial tools will be necessary to unlock the full potential of India’s MSME sector.

For startups, fintech players, and entrepreneurs looking to serve or collaborate with MSMEs, the findings offer valuable direction. From building digital credit products to enabling green transition tools, the MSME landscape is ripe with opportunities—if approached with insight and intent.