The measures announced in the Budget to develop the micro, small and medium enterprises (MSMEs) sector will lead to a pick-up in banks’ loans to such entities while also preserving their stable asset quality, senior bankers say.

“The launch of the credit guarantee scheme (for MSMEs), which provides term loans of up to Rs 100 crore without collateral, will notably reduce risk for banks and expand their lending opportunities, facilitating greater investment in essential machinery and equipment,” said Rajan Pental, ED at YES Bank.

According to experts, MSMEs, which provide large scale employment opportunities, have an estimated credit gap of Rs 28 trillion. To address it, finance minister Nirmala Sitharaman has proposed to launch a credit guarantee scheme for MSMEs to purchase machinery and equipment without collateral or third party guarantee, among other initiatives.

Says Debadatta Chand, MD & CEO of Bank of Baroda, “The banking sector can see substantial positive takeaways from the Budget which goes beyond the neutral impact on liquidity. There is a focus on MSMEs, with a credit guarantee scheme being brought in. Any support to MSMEs will be a positive for not just the GDP, but also employment.”

Ajay Kumar Srivastava, MD of Indian Overseas Bank, shared similar views. The focus given to the MSME sector will provide a huge boost to the growing number of entrepreneurs. The initiatives are also expected to provide the much-needed accessibility to credit and additional support required for further growth of the sector, he said.  

Sanjay Agarwal, senior director at CareEdge Ratings, said availability of GST data and account aggregators have enabled financiers to lend proactively to MSMEs. Bank credit to industrial MSMEs has grown by over 13% in the last two years. Additionally, there has been a significant improvement in overall delinquencies in the sector – from over 12% in FY17 to 2.3% in Q2FY24.

According to Pental, the new credit assessment model, which leverages digital footprints, represents a transformative shift in evaluating MSME creditworthiness. This will streamline the credit process and extend support to MSMEs that lack formal accounting systems, making credit access more inclusive and efficient. Additionally, the hike in Mudra loan limit from Rs 10 lakh to Rs 20 lakh and measures to provide loans to stressed MSME are designed to stabilise borrowers and reduce the likelihood of non-performing assets, he said.

Sundeep Mohindru, promoter and director of M1xchange, a TReDS platform, said by lowering the turnover threshold for buyers from Rs 500 crore to Rs 250 crore, 22 central public sector enterprises and 7,000 more companies could be onboarded TReDS platforms. “As a result, banks and NBFCs will be drawn to TReDS, offering MSMEs collateral-free working capital at competitive rates. Also, MSMEs which are already registered on these platforms can now get more invoices discounted,” he said.