By Shachindra Nath, Founder and Managing Director, UGRO Capital

As India gets closer to the Union Budget on February 1, the discussion regarding economic growth is once again focusing on MSMEs. And this is absolutely correct too. MSMEs contribute more than 30 percent of India’s GDP, provide employment to more than 100 million people and form the backbone of domestic supply chains, exports and entrepreneurship in towns and districts.

Over the past few years, MSMEs have shown tremendous resilience despite global shocks, supply chain disruptions and tightening financial conditions. Yet, despite their central role in the economy, access to timely and affordable credit remains a persistent challenge. Now the question is not whether MSMEs are getting credit or not, but whether this credit is sustainable, predictable and in line with their business realities.

This Budget presents a huge opportunity to shift the MSME credit conversation from short term liquidity support to long term credit longevity.

Shift of MSME Lending from Collateral to Cash Flow

A major structural constraint in MSME financing has been excessive dependence on collateral. This leaves out many viable enterprises that are profitable and growing, but do not have traditional asset backing. India’s digital public infrastructure is uniquely positioned to solve this challenge.

With the maturity of GST data, Account Aggregators, e-invoicing and OCEN frameworks, lenders can now assess MSMEs based on cash flows, business behavior and sector specific dynamics. The Budget can further accelerate this change if it encourages co-lending models, combining low cost capital of banks and the underwriting expertise and last mile reach of specialized NBFCs. This type of collaboration enables scale while maintaining credit quality and financial stability.

Creating Stable Funding Backbone for MSME Focused NBFCs

MSME focused NBFCs play a critical role in reaching underserved enterprises, but they remain structurally dependent on market borrowings. At times of liquidity tightening, even good performing portfolios face funding pressure. This reflects the need for a more predictable and counter cyclical funding architecture.

A key recommendation from the industry is to create a dedicated category of NBFC MSME or NBFC Priority Sector, which would recognize institutions with a predominantly MSME loan book. Along with this, a structured refinance window anchored through SIDBI can provide longer tenure and lower cost funding. Such a mechanism would help MSME lenders continue to support viable enterprises during economic cycles, rather than withdrawing in times of stress.

Strengthening Credit Guarantees and Recovery Confidence

Credit guarantees are a powerful tool to increase lender confidence and responsibly expand MSME credit. There is considerable scope for broadening partial credit guarantee schemes, especially for small ticket and short tenure loans in the manufacturing, services and trade segments, which are still under penetrated.

It is equally important to strengthen the recovery frameworks. Rationalizing SARFAESI thresholds for NBFCs, improving digital recovery processes and ensuring regulatory parity among lenders can substantially reduce risk perception and borrowing costs over time. A strong recovery ecosystem ultimately enables lenders to lend with greater confidence.

Policy Alignment with the Realities of MSMEs

Improving MSME credit does not just mean maximizing disbursement numbers. Its objective is to improve the quality and resilience of lending. Revisiting Priority Sector Lending norms in line with current MSME structures, providing targeted tax or TDS relief on PSL loans and continuing efforts to ensure timely payments to MSMEs can address the stress at its root.

Promoting sector specific underwriting and adopting cash flow aligned repayment structures will help in reducing NPAs not cyclically but structurally. This alignment between policy, lender incentives and MSME realities is essential for sustainable credit expansion.

From Credit Expansion to Lasting Credit Confidence

The real success of MSME policy will not be measured by how much credit is disbursed in a year, but by how predictable, affordable and resilient that credit remains over time. A Budget that focuses on funding stability, efficient risk sharing and regulatory alignment can transform MSME credit from a periodic intervention to a permanent growth enabler.

This approach will protect jobs, strengthen local supply chains and further strengthen India’s economic resilience. The most important thing is that this will not only enable MSMEs to face uncertainty, but will also be able to lead India’s growth journey in the coming years.