Private sector banks have emerged as the key drivers of credit disbursement to Micro, Small, and Medium Enterprises (MSMEs) under the Priority Sector Lending (PSL) framework, with their lending soaring nearly threefold over the past five years. The total credit extended by private banks to MSMEs surged from ₹4.56 lakh crore in 2019 to ₹12.64 lakh crore in 2024, data submitted by the Finance Minister Nirmala Sitharaman in a written response to a Lok Sabha question showed.
The overall banking sector’s credit flow to MSMEs doubled over the same period, reaching ₹21 lakh crore in 2024, up from ₹10.06 lakh crore in 2019. In contrast, public sector banks (PSBs) recorded a comparatively moderate increase, with their lending to MSMEs rising from ₹5.5 lakh crore in 2019 to ₹7.26 lakh crore in 2024.
The trend underscores the aggressive expansion of private banks in the MSME credit segment, leveraging digital platforms, streamlined loan approvals, and risk-based lending models to drive financial inclusion, banking industry observers said.
Surge in Priority Sector Lending
The total credit disbursement to priority sectors, which include agriculture, MSMEs, and social infrastructure, witnessed an 85 percent rise over the past six years. In 2019, banks disbursed ₹23.01 lakh crore to priority sectors, a figure that climbed to ₹42.73 lakh crore in 2024. The substantial jump highlights the banking sector’s growing focus on meeting PSL targets and supporting economic growth through targeted lending.
MSMEs remain a critical component of the PSL framework, with banks mandated by the Reserve Bank of India (RBI) to allocate a specific portion of their credit to the sector. These measures ensure that small businesses, often underserved by traditional banking channels, have access to financial resources for expansion and sustainability.
Private Banks Outpace Public Lenders
The sharp growth in MSME lending by private banks reflects a shift in banking dynamics. While PSBs have traditionally been the primary lenders to MSMEs, private banks have significantly expanded their footprint in this space by offering faster loan approvals, collateral-free lending, and customized financial products.
Industry experts attribute this growth to multiple factors:
(1) Digital Lending Innovations: Private banks have leveraged fintech collaborations, online lending platforms, and AI-driven credit assessments to improve loan processing times and expand access to MSMEs.
(2) Risk-Based Pricing Models: Unlike traditional banks, which often rely on collateral-heavy lending, private banks have introduced alternative credit evaluation methods, allowing businesses with limited financial histories to access funds.
(3) Government and RBI Support: Initiatives like MUDRA loans, PSB Loans in 59 Minutes, and Emergency Credit Line Guarantee Scheme (ECLGS) have played a significant role in expanding credit access, particularly in the wake of the COVID-19 pandemic.
Challenges in MSME Lending
Despite the increase in credit flow, MSMEs continue to face challenges in securing financing. Some of the key hurdles include:
(1) Collateral Requirements: While collateral-free loans are available for micro-enterprises, many small and medium businesses still struggle with stringent collateral norms, particularly in PSBs.
(2) High Interest Rates: Private sector banks often charge higher interest rates compared to PSBs, making loans costlier for small businesses.
(3) Financial Documentation Barriers: Many MSMEs, particularly in the informal sector, lack proper financial records, which limits their access to formal credit.
Future Outlook and Policy Interventions
To bridge the credit gap for MSMEs, the government and the RBI have been implementing multiple reforms, including:
• Expansion of Credit Guarantee Schemes: The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) has been strengthened to provide greater collateral-free credit options.
• Digital Public Infrastructure for MSMEs: The RBI has been pushing for the adoption of Account Aggregators to help small businesses build financial credibility and secure loans more easily.
• Customized Credit Solutions: The introduction of cash-flow-based lending models and risk-adjusted credit solutions is expected to further enhance MSME financing.
