Why MSMEs Still Struggle to Access Bank Credit Despite So Many Schemes

Bridging the gap between policy and practice for India’s real growth engines.

Introduction: The Promise vs. The Pain

India’s Micro, Small and Medium Enterprises (MSMEs) are celebrated as the backbone of the Indian economy, contributing significantly to employment, exports, and innovation.

Yet, ask any small entrepreneur, “Is getting a bank loan easy?” and you’ll often hear, “Sir, bahut mushkil hai.”

Despite dozens of government schemes like MUDRA, CGTMSE, Stand-Up India, and PMEGP, the ground reality remains unchanged. The issue lies not in policy creation, but in execution.

1. Policy Looks Simple, Practice Feels Complicated

On paper, schemes promise collateral-free loans and faster approvals. In reality, banks remain risk-averse.

Even when schemes allow unsecured lending, many bankers hesitate due to fear of recovery issues and audits. As a result, first-time and micro borrowers are often excluded.

2. Weak Documentation: The Silent Deal Breaker

Banks lend based on data, not intent. Many MSMEs operate informally, with incomplete books and inconsistent tax filings.

Example: If your actual sales are ₹100 lakh but GST returns show ₹30 lakh, the bank will assess your credit on ₹30 lakh only.

3. Financial Literacy: The Missing Ingredient

Many entrepreneurs understand business but not banking.

• Choosing the wrong loan scheme
• Submitting incomplete documents
• Misunderstanding eligibility criteria

These small gaps often lead to rejection or long delays.

4. Collateral & Credit History Hurdles

Even under collateral-free schemes, CIBIL score, repayment history, and business stability matter.

First-generation entrepreneurs without assets face additional hurdles, discouraging bankers from processing such cases.

5. Perception Gap Between Banks & Business Owners

Bankers focus on ratios and risk. Entrepreneurs talk about vision and effort.

This disconnect leads MSMEs to seek NBFCs or private lenders, often at higher interest rates.

6. Slow Adoption of Digital Tools

Businesses without digital footprints struggle to prove activity.

UPI transactions, GST filings, and digital invoices help establish bankability.

7. Short-Term Loans, Long-Term Dreams

MSMEs often receive short-term working capital but not long-term growth finance.

This keeps businesses stuck in survival mode instead of scaling mode.

The Way Forward – A Joint Responsibility

For MSMEs

• Maintain proper financial records
• Improve financial literacy
• Seek structured handholding support
• Build funding readiness through GRO Score

For Banks & Policymakers

• Simplify procedures
• Use alternative data for credit assessment
• Set up MSME Credit Clinics

Conclusion: Turning Struggle into Strength

The credit problem is an ecosystem issue.

When MSMEs become financially ready and banks become growth partners, credit will flow naturally.

Key Takeaway

Schemes open doors. Readiness walks through them.

Ashok Jha
Founder, GRO-MSME Club