India's MSME Credit Conundrum: Who Will Bridge the ₹30 Lakh Crore Gap?

India’s micro, small, and medium enterprises (MSMEs)—often hailed as the silent engines of the nation’s economy—are facing a massive financial roadblock. Despite contributing nearly a third to the country’s GDP and employing over 110 million people, these businesses are grappling with a credit gap of ₹30 lakh crore, as revealed in a recent report by the Small Industries Development Bank of India (SIDBI).

This shortfall—representing 24% of the sector's total credit demand—is not just a number. It reflects a deep-rooted structural challenge that continues to prevent millions of entrepreneurs from accessing the funds they need to grow, sustain, or even survive. From women-led ventures to trading businesses, and from medium enterprises to service providers, the financial ecosystem still leaves critical gaps that policy and innovation have yet to bridge.

The Backbone of the Economy, But Financially Strained

India’s MSME sector is a vital cog in the economic machinery. With over 63 million MSMEs operating across the country, these businesses contribute significantly to employment, manufacturing output, and exports. They are key players in creating livelihoods at the grassroots level and nurturing entrepreneurial ambition in both urban and rural areas.

Yet, as the SIDBI report reveals, a large portion of this sector remains underfinanced. While there has been a visible improvement in formal credit disbursal to MSMEs over the years—helped by initiatives like PSBLoansIn59Minutes, MUDRA, and Udyam Registration—a large percentage of businesses still fall through the cracks.

Who’s Affected the Most? Breaking Down the Credit Gap

The credit gap isn’t uniform across the MSME sector. Certain segments are facing a more severe shortage of capital, and SIDBI’s report helps spotlight where the need is most urgent.

1. The Services Sector: A 27% Credit Gap

The services sector, which encompasses everything from logistics and tourism to IT services and retail, is among the worst hit. With a credit gap of 27%, businesses in this category often find it harder to secure loans due to the intangible nature of their assets and lower perceived creditworthiness by traditional financial institutions.

2. Women Entrepreneurs: Left Behind in the Credit Race

One of the most concerning findings of the report is the 35% credit gap for women-led MSMEs—substantially higher than the 20% gap faced by male-led businesses. This not only highlights systemic biases in lending practices but also points to the lack of tailored financial products for female entrepreneurs.

Many women business owners still rely on informal lending from family, friends, or local moneylenders—resources that are neither sustainable nor scalable. The absence of formal credit limits their potential to expand, digitise, or even weather market fluctuations.

3. Medium Enterprises: High Potential, Higher Risk

While much focus is placed on micro and small enterprises, medium-sized businesses—those on the cusp of scaling—face their own unique challenges. According to SIDBI, they suffer from a 29% credit gap, which is particularly worrisome because these companies typically require significant capital for infrastructure, talent, and technology.

At this stage, a lack of timely funding can derail expansion plans, cause operational bottlenecks, or even lead to business closures—despite otherwise strong fundamentals.

4. Trading Businesses: The Highest Shortfall at 33%

MSMEs involved in trading activities are struggling with the highest credit shortfall at 33%. These businesses often don’t possess physical assets that can serve as collateral, which makes them ineligible for many traditional loan schemes. Moreover, the fast-moving nature of trading means they require flexible working capital arrangements that most banks don’t currently offer.

Formalisation and Fintech: The Silver Lining

Despite the concerning numbers, the report also brings out a few green shoots of progress.

SIDBI notes the increasing formalisation of the MSME ecosystem, with more businesses coming under the umbrella of Udyam registration and GST compliance. This shift is opening doors for greater financial inclusion and better visibility into the real needs of small businesses.

In parallel, the rise of digital lending and fintech platforms is transforming credit access for previously excluded entrepreneurs. Startups leveraging alternative credit scoring models, embedded finance, and mobile-first loan applications are helping MSMEs get faster, more relevant, and more flexible funding options.

This is especially crucial in Tier 2 and Tier 3 cities, where traditional bank branches may not cater effectively to entrepreneurial needs.

Policy, Productivity, and Path Forward: What Needs to Happen Next

To close this credit gap, SIDBI has recommended a range of structural, policy-level, and market-driven interventions.

1. Targeted Financial Products for Underserved Segments
There’s a strong case for developing lending instruments tailored for women entrepreneurs, medium-sized businesses, and services/trading enterprises. This could include low-collateral loans, credit guarantees, and schemes that reward formalisation.

2. Market Access and Infrastructure Support
For MSMEs to thrive, access to markets—both domestic and global—is critical. SIDBI emphasizes strengthening supply chains, creating better logistics hubs, and offering greater procurement support through government and corporate partnerships.

3. Emphasis on Skill and Digital Adoption
To enhance productivity and competitiveness, continued investments in digital tools, financial literacy, and upskilling are necessary. MSMEs that digitise are better able to manage their cash flows, reach wider markets, and become more creditworthy.

4. Enabling Credit Through Data Sharing Ecosystems
The emergence of platforms like Account Aggregators can play a transformative role in MSME lending. By securely sharing business data, banks and NBFCs can better assess risk and extend credit to previously “unbankable” businesses.

Tying It All Back to Viksit Bharat

SIDBI’s findings come at a crucial time, as India gears up to become a developed economy under the ‘Viksit Bharat’ vision by 2047. But that vision will remain incomplete if India’s MSMEs—arguably the largest driver of grassroots entrepreneurship—are left behind due to outdated lending systems and capital bottlenecks.

Supporting MSMEs isn’t just about economics—it’s about enabling dreams, creating jobs, empowering women, and fuelling inclusive growth. A ₹30 lakh crore gap is not merely a financing challenge; it's a growth opportunity waiting to be unlocked.

The Clock is Ticking

The message from SIDBI is loud and clear: India needs to act with urgency and intent. The ₹30 lakh crore credit gap isn’t just a statistic—it’s a reflection of businesses waiting for their shot at scale and success.

With the right mix of policy support, financial innovation, and inclusive intent, this gap can be closed—and in doing so, India can unleash the true potential of its MSME sector, cementing its place as a global economic powerhouse in the decades to come.