Small business is the backbone of every large economy. India has more of these businesses than almost anyone — over 63 million, employing more than 110 million people and driving close to half of exports. Yet India's MSMEs contribute about 30% of GDP, well below the ~50-60% that peers like China, Germany and the United States get from theirs.
It is tempting to read a low GDP share as low productivity or low ambition. The data points elsewhere. India's MSMEs run on a fraction of the formal credit their peers take for granted — the RBI's own Expert Committee (U.K. Sinha, 2019) estimated the gap at ₹20-25 lakh crore.
An access problem, not an effort problem
Much of what is lent is collateral-secured revolving working capital — cash credit and overdraft against property and stock. That channel serves the asset-rich, but it caps a business at the value of what it can pledge, not the trade it actually does. The channels that could finance trade on its own merits — factoring, supply-chain finance, receivables discounting — remain thinly used: India's factoring is barely 1% of GDP, against roughly 12% in the EU.
Why creditworthy businesses still can't borrow
Past the collateral ceiling, much of what holds lending back is informational — and that is the RBI's own diagnosis. When a small manufacturer's trade history, buyer relationships, registrations and order book can't be confirmed quickly and cheaply, the safe answer for an overworked credit desk is no — and the unit economics make that rational, because a small-ticket loan carries nearly the same underwriting cost as a large one. (A caveat the report makes plainly: this is about the registered layer that leaves a verifiable trail — GST returns, e-invoices, and increasingly UPI-via-Account-Aggregator cashflow — not the cash-only micro-tail that needs formalisation first.)
Where a verification layer fits
The State has pushed hard — priority-sector lending norms, the 45-day payment rule, a higher collateral-free ceiling, and the CGTMSE guarantee. What is still missing is a shared, consent-based way to verify trade and transaction evidence, so each lender need not rebuild that work application by application. That is a verification and evidence layer — a complement to lending, not a substitute for the lender's judgement.
Read the full analysis in our policy report, The MSME Growth Gap.