Small firms, large credit gap

Small manufacturers are frequently described as the backbone of India's industrial employment, yet formal bank credit continues to reach only a minority of them, according to an analysis of recent bank lending disclosures and industry survey data reviewed for this piece.

Cash-flow based lending — underwriting a loan against a business's transaction history and receivables rather than physical collateral — has been actively promoted by policymakers and fintech lenders for several years as the solution to this gap. Adoption has grown, but from a small base, and collateral-backed lending still dominates the sanctioned loan book at most public and private sector banks.

"The technology to underwrite on cash flow exists and works. What's slower to change is credit committee culture inside legacy banks," said a banking sector consultant who advises lenders on MSME portfolios. "Branch managers are still measured and protected by collateral coverage, so that's what they ask for."

The consequence is a persistent bifurcation in the small manufacturer segment: firms with property or fixed assets to pledge secure formal credit at competitive rates, while firms without such assets — often younger or more informally structured businesses — rely on more expensive informal credit or trade finance from suppliers.

Several public sector lenders point to expanding disbursement volumes under government-backed credit guarantee schemes as evidence that the gap is narrowing, and cite improving non-performing asset ratios in the segment as proof that cash-flow underwriting is working where it has been tried.

Independent researchers are more cautious, noting that disbursement growth partly reflects overall credit market expansion rather than a structural shift away from collateral, and that a comprehensive picture will require several more years of lending data to confirm.