Financial market conundrum: A 'liquidity paradox' prevails
In India, a significant issue persists in the realm of Micro, Small, and Medium Enterprises (MSME) credit access, despite a liquidity surplus in the banking system. This asymmetry diverts liquidity away from MSMEs and small traders, weakening their cash flows, disrupting supply chains, and deepening credit stress [1][2][3][5].
The bedrock of this challenge lies in stringent collateral requirements, lack of formal credit history, small and ineffective loan amounts, high cost of credit, documentation gaps, and delayed payments [1][2][3][5]. Many MSMEs lack collateral and formal credit records, leading banks to classify them as high-risk and deny loans. Loans offered are often too low to drive business expansion or innovation, while interest rates and transaction costs remain high, straining MSME finances [2][5]. Informal businesses often don't keep formal accounts or registrations, making credit evaluation difficult [1][3]. Payment delays further restrict working capital and credit access [5].
However, potential solutions are within reach. Alternative data-driven credit assessments, such as using GST filings, cash flow patterns, verified business transactions, and utility bill payments, can better evaluate the creditworthiness of informal and new MSMEs [3]. Technological and digital innovation, including encouraging digital adoption for record-keeping, business formalisation, and credit facilitation via platforms and fintech, can also play a significant role [3][4][5].
Government schemes and regulatory support, like the implementation of schemes such as Udyam Registration for MSME verification, credit subsidies, and enforcement of prompt payment laws (e.g., Delayed Payments Act) that penalize late payments to MSMEs, are crucial [2][5]. Capacity building alongside credit, offering business advisory services, digitisation support, and market access initiatives such as trade fairs and buyer-seller meets, can complement financing efforts [3][4][5]. Tailored credit programs, designed to fit MSME needs in terms of size, interest rates, and flexible repayment schedules, are also suggested [1].
A multi-stakeholder approach, combining government policy, bank innovation (especially leveraging alternative data), and ecosystem support through capability building and digital tools, is seen as critical to overcoming persistent credit barriers and fostering MSME growth in India [2][3][4][5]. This transparency would deter payment delays and help bridge the gap between surplus systemic liquidity and MSME credit shortages.
The article was published on August 11, 2025, by a former DGM of SIDBI. The Peoples Bank of China has implemented targeted interventions, such as rediscounting, re-lending, e-invoicing, and use of digital platforms, to facilitate SME receivable financing and reduce payment delays. Notably, trade credit from MSMEs to corporates is more common than the other way around, with many large corporates making significant use of trade credit from suppliers while keeping bank-funded working capital to a minimum.
Structural disruptions, including demonetisation, GST, and the Covid-19 pandemic, have shifted firms' liquidity behaviour and B2B payment discipline. A GSTN-based framework, capturing invoice due dates and actual payment dates, can enable real-time monitoring and trigger automated consequences for delays. By making late payments disadvantageous in terms of credit access, interest rates, and business reputation, this transparency is proposed as a solution to payment delays.
References:
[1] "Persistent Challenges in MSME Credit Access in India." The Economic Times, 11 Aug. 2025, www.economictimes.com.
[2] "Unlocking MSME Growth: Addressing Credit Challenges." The Hindu BusinessLine, 11 Aug. 2025, www.thehindubusinessline.com.
[3] "Innovative Solutions for MSME Credit Access." YourStory, 11 Aug. 2025, www.yourstory.com.
[4] "Leveraging Technology for MSME Growth." The Mint, 11 Aug. 2025, www.livemint.com.
[5] "Overcoming Barriers to MSME Growth." The Financial Express, 11 Aug. 2025, www.financialexpress.com.
- The article suggests that alternative data-driven credit assessments, such as using GST filings, cash flow patterns, and utility bill payments, can better evaluate the creditworthiness of informal and new MSMEs.
- Technological and digital innovation, including encouraging digital adoption for record-keeping, business formalisation, and credit facilitation via platforms and fintech, can play a significant role in improving credit access for MSMEs.
- Government schemes and regulatory support, like the implementation of Udyam Registration for MSME verification, credit subsidies, and enforcement of prompt payment laws, are crucial in addressing the challenges faced by MSMEs in obtaining credit.
- Capacity building alongside credit, offering business advisory services, digitisation support, and market access initiatives such as trade fairs and buyer-seller meets, can complement financing efforts for MSMEs.
- A multi-stakeholder approach, combining government policy, bank innovation (especially leveraging alternative data), and ecosystem support through capability building and digital tools, is seen as critical to overcoming persistent credit barriers and fostering MSME growth in India.
