Govt may allow digital banks to meet credit gap for MSMEs

The central government may allow digital banks for small businesses to meet credit gap faced by about 60 million micro, small and medium enterprises (MSMEs) which compels these units to borrow from the informal sector, three people aware of the development said, adding that the upcoming Budget may provide a road map.

About 63.8 million MSMEs are the backbone of the Indian economy, creating over 111 million jobs. The share of their gross value added in the national GDP in 2020-21 was 26.83%. They represented 36% of India’s manufacturing output that year, with over 45% contribution in exports. They urgently need easy access to formal credit of around ₹25.8 lakh crore, they said, asking not to be named.

Despite the Reserve Bank of India’s move of financial deepening through various measures, including priority sector lending guidelines, MSMEs are not getting wide access to credit at scheduled commercial banks. They are forced to access capital from informal money markets such as moneylenders, chit funds or illegal loan apps, they said.

“They require more and easier formal avenues apart from the 75 digital banking units,” one of the people quoted above said. The digital banking units are arms of the State Bank of India, Punjab National Bank, ICICI Bank and HDFC Bank launched by Prime Minister Narendra Modi in 75 districts on October 16, 2022.