Introduction: The Invisible Cash Flow Crisis
In India’s manufacturing landscape, the story of small enterprises often begins and ends with cash. Consider a medium-sized auto-component workshop in Pune, capable of fulfilling large OEM orders, yet unable to secure a loan for urgent working capital. The bank sees the company as “high-risk,” even though it has consistent order inflows and a track record of timely deliveries. This paradox is common: while policy and media often report credit availability for MSMEs, the reality on the ground is markedly different.
Despite formal schemes, banks and NBFCs report low uptake, while micro-enterprises continue to rely on informal loans at high interest rates, delaying growth and innovation.
The Numbers Behind the Mirage
Recent surveys shed light on the gap:
- SIDBI MSME Survey 2025 indicates that nearly 62% of manufacturing MSMEs report difficulty in accessing formal credit.
- ICRIER MSME Report 2025 shows that even digitally capable MSMEs face barriers, not due to capability, but risk perception by lenders.
- The CGTMSE (Credit Guarantee Fund for Micro & Small Enterprises) scheme covers thousands of loans annually, yet only a fraction reach manufacturers in smaller clusters like Nashik, Rajkot, or Tirupur.
The paradox emerges: the supply of credit exists statistically, but practically it remains inaccessible.
Structural Reasons for Limited Access
1. Collateral Requirements
Most small manufacturers operate in rented premises, or own land with unclear titles. Banks require collateral that exceeds the value of the requested loan, effectively locking out many enterprises.
2. Documentation and Compliance Hurdles
Many MSMEs have incomplete or informal accounts. Banks require audited financial statements, GST compliance records, and proof of order history. For a workshop operating on cash-based transactions, this creates a near-impossible barrier.
3. Risk Aversion and Informality
Even if the enterprise is profitable, lenders perceive small manufacturers as high risk due to the volatility of demand, reliance on a few buyers, and lack of digital footprint. Informal lending networks thrive because they are more flexible and faster.
4. Tech and Process Gaps
Enterprises that have partially digitalised operations — simple bookkeeping or order tracking — see slightly better access to finance. Yet, low adoption of ERP, digital invoicing, and automated inventory management continues to constrain formal credit.
5. Compliance Overload
Complex GST filings, labour and environmental compliance, and multiple regulatory frameworks increase operational overhead, leaving MSMEs with less time and expertise to prepare bankable documents.
Bridging the Gap: Innovative Financing Approaches
Several financial innovations and policy tools are beginning to change the landscape:
1. TReDS (Trade Receivables Discounting System)
Enables MSMEs to convert invoices to immediate cash. By linking buyers, financiers, and sellers digitally, this reduces dependence on traditional collateral.
2. Supply-Chain Finance
Large OEMs and anchor buyers can facilitate short-term loans for their MSME suppliers based on confirmed orders, easing cash flow without requiring collateral.
3. Credit Guarantee Schemes (CGTMSE, SIDBI-backed programs)
These mitigate lender risk by providing guarantees for unsecured loans, though awareness and procedural complexity limit uptake.
4. Fintech Platforms
Emerging NBFCs and fintech lenders now leverage transaction data, GST filings, and digital footprints to assess creditworthiness in real time, reducing delays and informal borrowing.
5. Cluster-based Financial Handholding
Industrial clusters adopting shared financial advisory, bookkeeping, and compliance support demonstrate higher credit access success rates, as seen in the Tirupur textile and Pune auto-component clusters.
Interlinkages with Technology and Compliance
Credit access is rarely isolated from operational efficiency. MSMEs that integrate:
- Basic ERP or digital invoicing
- Automated inventory and supply chain tracking
- Proactive GST and labour compliance
…not only improve productivity but also become “visible” to formal lenders. Banks increasingly rely on digital data points to assess risk, meaning that even modest tech adoption can significantly increase the likelihood of securing loans.
Key Takeaways for MSME Owners
- Document Everything Digitally – Simple bookkeeping and invoice tracking can dramatically improve credibility.
- Leverage Trade Finance Tools – TReDS and supply-chain finance reduce reliance on collateral-heavy loans.
- Cluster Participation – Sharing compliance and finance advisory reduces procedural bottlenecks.
- Understand Available Schemes – CGTMSE and SIDBI-backed programs can mitigate lender risk.
- Plan Holistically – Technology, compliance, and finance must work together to make the enterprise “bankable.”
Next in the Series
For Week 3, we will examine “Delayed Payments and the Slow Death of India’s Manufacturing Liquidity”, focusing on how buyer concentration, invoice delays, and working capital gaps threaten MSME survival, and what practical interventions can mitigate these risks.
About the Author
Sanket Kapadnis is the Founder of ThinkSDG Advisors. He works on MSME capacity-building, market linkages, investment-readiness, and sustainability-oriented development models.