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Credit to micro, small and medium enterprises (MSMEs) has emerged as a key driver of bank loan expansion in recent years, supported by strong policy measures, government-backed credit guarantees and wider formalisation through the Udyam registration framework, highlighted a report by Axis Bank.
The report highlighted that in FY25, MSMEs accounted for 22 per cent of incremental non-food bank credit, taking their overall share in total non-food credit to 18 per cent, highlighting the growing importance of the segment in India's banking system. The steady rise in MSME lending has been aided by a combination of lower interest rates, government credit-loss guarantees and increased use of technology-driven, data-based underwriting by banks. It stated "MSME credit drives loan expansion, aided by government-led guarantees and initiatives to increase registration (Udyam)". The report mentioned that government-led credit guarantee schemes have played a critical role in improving lenders' confidence and expanding access to finance for smaller businesses. The report data showed that MSME credit guarantee coverage has increased sharply compared to FY21. The number of guarantees rose from about 5.2 million in FY21 to over 10 million by December 2024, reflecting the sharp expansion in coverage over a short period. Alongside the rise in the number of guarantees, the cumulative amount approved under credit guarantees increased from around Rs 2.6 trillion till FY21 to about Rs 8.1 trillion till December 2024. This significant jump indicates not only higher participation by MSMEs but also larger ticket sizes and deeper penetration of formal credit across sectors. The policy push has been complemented by steps to increase MSME registration through the Udyam portal, which has helped bring more enterprises into the formal system. Higher registration has improved data availability and transparency, allowing banks to better assess creditworthiness and expand lending to first-time and small borrowers. Another key factor supporting MSME credit growth has been the sharp fall in interest rates, which has reduced borrowing costs and encouraged enterprises to seek formal loans. Lower rates, combined with credit-loss guarantees, have helped mitigate lender risk and improve credit flow, especially to micro and small units. Banks have also increasingly adopted data-driven underwriting, using alternative data sources such as GST returns and utility bill payments to assess borrowers. This shift has enabled faster credit appraisal, reduced dependence on traditional collateral and improved access for smaller firms that may lack extensive financial histories. Overall, the report shared that the combination of policy support, government-backed guarantees, formalisation through Udyam, and technology-led lending has strengthened credit flow to MSMEs. (ANI)
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