Episode 6 : MSME Policy Reforms 2025: Empowerment or Empty Promises?

Policy Vs Practice Series

In FY 2024–25, MSME lending powered ahead as the fastest‑growing credit segment in India.”MSME loans surged 14.1%, outstripping retail (11.7%) and services (11.2%) 

Their share of total (non‑food) bank credit hit an all‑time high of 17.7%, with outstanding MSME lending crossing ₹14.3 lakh crore by May 2025.

The subprime borrower share in MSME portfolios dropped from 33.5% in June 2022 to 23.3% in March 2025

policy is working—and lending is growing, cleanly.

 Policy Intent vs Practice Reality

What Policy Aims to Achieve:

• Broader credit via digital onboarding, cash‑flow lending, guarantee schemes (CGFMU & ECLGS covering ₹6.28 lakh cr)

• Higher risk appetite, especially by PSBs leveraging guarantees to include subprime or new-to-credit MSMEs 

  
  

But in Practice:

• Many small/micro businesses still lack access due to rigid credit templates or missing digital infrastructure.

• AA penetration, while rising, remains inconsistent—ability to fetch verified statements is uneven.

• Products like sweep-linked WC lines or weekly usage models are rarely live in core systems.

• Structural friction persists for seasonal revenues, platform sellers, and service MSMEs.

Real-World Sentiments from the Field - MSME Policy Reforms

MSME Policy Reforms

Simple Playbook to Close the Gap

Step	What to Do	Why It Works
1	Cash-map (12-week rolling) using statements + UPI + platform data	Captures real revenue, not just invoices
2	Build Cash-Quick metric (cash + payouts – dues)	Liquidity focus over traditional ratios
3	Enable sweep-linked rolling WC lines (digital auto-sweep)	Product fit for cyclical working capital
4	AA onboard in vernacular, co-browsed	Reduces friction in consent process
5	Claim-TAT targets for CGTMSE/ECLGS	Elevates guarantee effectiveness
6	Rewards for AA coverage & sweep discipline	Aligns incentives to actual usage, not just sanction

A practical underwriting design that blends old school with new school

Step 1 — Cash map (12 weeks, rolling):Pull AA where possible; else upload statements. Add UPI/QR receipts, platform settlements, and cash-in-hand snapshots. Normalize for seasonality (last year, same weeks).

Step 2 — Triangulate sales reality:

• GST (where applicable) ↔ platform payouts ↔ QR receipts ↔ stock turns.

• Outlier rule: If QR/UPI share >70% of gross credits and returns are elevated, flag for deeper review.

  
  

Step 3 — Build a “Cash-Quick” metric:Cash on hand + bank balance + next-7-day confirmed platform payouts + average daily QR receipts × 7 − statutory dues due in 7 days.Use this in place of (or alongside) the quick ratio.

Step 4 — Right-shape the product:

• Rolling WC line with weekly sweeps (auto-debit of a % of inflows).

• Festival top-up sub-limit with pre-agreed cleanup period.

• Invoice-lite option for platform sellers (settlement statements as proxy).

  
  

Step 5 — Covenants that matter:

• Minimum cash-quick threshold.

• Sweep discipline: at least X% of inflows swept every week.

• Concentration: no single platform/anchor >60% of gross receipts.

• AA refresh (or bank statement upload) every 60–90 days.

  
  

Step 6 — Early-warning triggers (EWT):

• Three consecutive weeks of sweep shortfall.

• NSF/return charges > 2 in 30 days.

• Sharp drop (>25%) in platform payouts vs the same season last year.

• Negative GST filing deviations for GST-registered borrowers.

  
  

Step 7 — Human-in-the-loop exceptions:A small, trained exception cell that can bless “good borrowers who look bad on paper”—with price adders or collateral light touch where needed.

What the people in the system are telling us (composite interview snippets)

• Public-sector branch manager, North India:

  “Policy says cash-flow. Audit wants collateral. Give me a weekly-sweep product and a clean AA journey; I’ll move.”

• Private-bank risk head :

  “Guarantees help, but our claim cycle time determines appetite. If claims take 8–10 months to settle, cost of credit doesn’t really drop.”

• Fintech founder, cash-flow analytics :

  “AA works best when co-browsed. Hit rates jump 15–20 percentage points if the loan officer sits with the customer and explains consent in local language.”

• MFI COO :

  “Our urban borrowers benefit from AA. For SHGs, we still trust the cash-circle and center meetings. A hybrid is where we’re headed.”

• SME CFO (auto-ancillary):

  “Seasonality is not distress. We need lenders who can tell the difference and price the working-capital hum, not the balance-sheet poetry.”

  
  

Actionable playbooks (who should do what, tomorrow morning)

For Policymakers & Regulators - MSME Policy Reforms

• Guarantee claims SLA: Time-bound (e.g., 60 days) settlement for approved claims; publish bank-wise claim success dashboards.

• AA adoption carrots: Supervisory credit for portfolios where AA coverage >50% of sanctioned limits; audit light-touch for compliant journeys.

• Open data standards: Templates for UPI/QR and platform payout statements so they flow into analyzers like bank statements.

• Product enablement: Encourage weekly-sweep lines and festival top-ups in standard WC products.

  
  

For Banks & NBFC

• One screen underwriting: Cash map + AA + GST + QR on a single underwriting canvas; benchmark cash-quick not just current ratio.

• Consent design: Co-browsed AA with vernacular scripts; capture a consent video to shut audit noise.

• Portfolio pilots: Take two districts and run a cash-anchored pilot with rolling lines; measure delinquency vs classic CC/OD.

• Change the scoreboard: Reward branches for AA coverage, covenant adherence, and sweep discipline, not just sanctions.

  
  

For MFIs

• Segmented AA use: Focus on salaried co-borrowers, micro-retailers, and urban SHGs; retain field checks elsewhere.

• Digital literacy cells: 2–3 “consent coaches” per region to lift AA hit rates and reduce fraud.

  
  

For Fintechs

• Explainable analytics: Translate UPI/QR/GST anomalies into plain-English reasons a credit officer trusts.

• Returns-aware scoring: For platform sellers, adjust for returns and cancellations; a 30% gross return rate is not a 30% sales boom.

  
  

For MSMEs

• Bank-ready hygiene: Keep a 12-week cash budget, reconcile QR/UPI receipts to platform statements, and file on time (even NIL).

• Consent literacy: Learn AA once; reuse for every lender—your underwriting TAT will drop sharply.

  
  

Risk you should worry about (and one you shouldn’t overplay)

• Don’t over-index to “wrong-way risk” in gold at micro-tenors—long memory shows gold drawdowns severe enough to break stock loans are rare on short windows. Manage it with margins and EWT; don’t let it paralyze lending.

• Do worry about concentration risk (single platform/anchor), policy shocks (import/export duties), and seasonality misreads that masquerade as stress. These are the real MSME NPA makers.

  
  

What to measure every month (a simple dashboard)

• AA coverage: % of active MSME limits with AA fetch in last 90 days.

• Consent funnel: Start → OTP success → data fetch → underwriter view (drop-offs point to UI issues).

• Cash-quick pass rate: % of borrowers above threshold; track vs delinquency.

• Sweep discipline: % weeks meeting sweep covenant; correlate to EWTs.

• Guarantee efficiency: Claims submitted, approved, TAT, cash realized.

• Seasonality fit: Variance of receipts vs last year same weeks (normalized).

• Product fit: Share of WC in rolling lines vs evergreen CC/OD.

  
  

The bottom line

India’s policy machine is humming. The credit machine, however, changes only when a branch officer can: (1) pull data seamlessly, (2) see a clear cash story, and (3) sanction a product that breathes with the business. That means co-browsed consent, cash-anchored underwriting, and weekly-sweep working-capital lines—not just more circulars.

If we redesign the micro-process, the macro will take care of itself: faster TATs, fairer pricing, and fewer NPAs. Until then, we’ll keep calling it “cash-flow lending” while renewing the same old CC/ODs.

Takeaways

• MSME credit is commanding growth—but a policy-to-practice gap is stopping many borrowers from accessing it.

• Closing the loop needs micro-lens fixes: tooling, consent, product shelf, and portfolio incentives.

• Bridge inspections matter: when credit officers can see cash reality and underwrite accordingly, policy becomes real.