Private Banks lead MSME credit growth, lending surges nearly threefold in 5 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.

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. 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...

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.

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 and • Customized Credit Solutions: The introduction of cash-flow-based lending models and risk-adjusted credit solutions is expected to further enhance MSME financing.