Panel urges co-lending push to bridge MSME credit gap

To tackle India’s massive $530-billion MSME credit gap, a Parliamentary Standing Committee has recommended an aggressive expansion of bank-NBFC co-lending models.

Written by FE Bureau

March 15, 2026 22:48 IST

Closing the $530 Billion Gap: Parliamentary Panel Calls for Co-Lending Surge to Power MSMEs

To bridge the estimated $530-billion (around ₹44,520 crore) formal credit gap faced by micro, small and medium enterprises (MSMEs), the Parliamentary Standing Committee on Finance has urged the government to aggressively expand structured co-lending arrangements between banks and non-banking financial companies (NBFCs) in order to lower the overall cost of capital for small businesses.

The committee highlighted the critical importance of the MSME sector, which employs around 33.34 crore people across 7.55 crore registered enterprises. It acknowledged several recent policy initiatives aimed at improving credit access, including the Rs 10,000-crore SME Growth Fund and the deployment of digital credit-assessment models designed to streamline lending decisions. Despite these measures, the panel noted that structural constraints in formal lending continue to persist.

While bank credit to MSMEs grew by 21.8% year-on-year (YoY), a significant portion of small businesses still depend heavily on NBFCs for financing. NBFCs often borrow from public sector banks but lend onward to MSMEs at higher risk-adjusted rates, leading to a rapid expansion in NBFC-MSME credit, which has grown at a compound annual growth rate (CAGR) of about 36%. Expanding structured co-lending models between banks and NBFCs, the committee said, could help reduce borrowing costs for MSMEs while improving credit penetration.

The panel also recommended a robust expansion of the Trade Receivables Discounting System (TReDS) to address liquidity challenges caused by delayed payments. By enabling MSMEs to discount invoices raised on corporate buyers, government departments and public sector undertakings, TReDS can provide faster access to working capital and ensure smoother operational cash flows for the so-called “missing middle”.

Highlighting the broader structural issue, the committee noted that India’s credit-to-private-sector-GDP ratio stands at about 57%, significantly lower than that of peers such as China (185%), South Korea (160%) and Brazil (74%). It observed that closing even 20% of the estimated MSME credit gap could inject nearly Rs 2 lakh crore into annual GDP, underscoring the importance of expanding formal credit channels.

In the Union Budget 2026–27, the government announced an additional Rs 2,000 crore for the Self-Reliant India (SRI) Fund, which aims to facilitate equity infusion of up to Rs 50,000 crore in growth-oriented MSMEs through a combination of government support and private capital.

Bank credit to MSMEs grew by 24.6% year-on-year in November 2025, compared with 10.2% growth a year earlier. MSME exports have also surged from Rs 3.95 lakh crore in 2020-21 to Rs 12.39 lakh crore in 2024-25, accounting for nearly 46% of India’s total exports.

On the TReDS platform, the number of invoices processed rose from 1.42 crore in December 2024 to 2.15 crore in December 2025, a 51.8% increase. The total value of invoices discounted climbed from Rs 4.5 lakh crore to Rs 7.6 lakh crore during the same period, reflecting a 68.9% year-on-year rise.

This article was first uploaded on March fifteen, twenty twenty-six, at forty-eight minutes past ten in the night.