How India’s Non-Bank Financial Institutions Are Bridging the MSME Credit Gap—and Key Lessons for Other Emerging Markets

**How India’s Non-Bank Financial Institutions Are Bridging the MSME Credit Gap—and What Emerging Markets Elsewhere Can Learn**

Micro, small, and medium-sized enterprises (MSMEs) are rightly hailed as the economic lifeblood of emerging economies. Globally, they make up about 90% of all businesses and employ more than half the world’s workforce. In developing countries, formal MSMEs alone contribute up to 40% of GDP and account for 70% of formal employment—a figure that would be even higher if informal enterprises and workers were included.

Yet despite their pivotal role, MSMEs consistently struggle to access the finance they need to thrive. Nowhere is this more evident than in India. According to a recent report by NITI Aayog—the government’s premier policy think tank—and the Institute for Competitiveness, only 19% of MSME credit demand was fulfilled through formal channels in FY2021, leaving an estimated ₹80 trillion in unmet financing needs. This chronic capital shortage stifles business growth, job creation, and, by extension, national economic progress.

**Alternative Lenders Step In: The Rise of NBFCs**  

Historically, India’s MSME lending was dominated by banks that demanded collateral and formal credit histories—requirements many small businesses simply couldn’t meet. Over the past five years, however, non-bank financial companies (NBFCs) have emerged as powerful alternatives, offering more agile and accessible loan products tailored to entrepreneurs with limited documentation or thin credit files.

This shift is clearly visible in the data: between FY2022–23 and FY2023–24, NBFCs expanded their MSME loan portfolios by 21.2% and 42.4%, respectively—far outpacing traditional banks, which posted modest growth of just 12.7% and 12.4% in the same periods (per Reserve Bank of India figures). NBFCs have also dramatically increased their provision of working capital—critical short-term funding for daily operations—raising their share of total secured MSME debt from 66% in Q1 2023 to 71% by Q4 2023. The results are already evident: MSME export value has soared from ₹3.95 trillion in 2020–21 to ₹12.39 trillion in 2024–25.

**Catalyzing Inclusive Growth Through NBFC Lending**  

NBFCs are transforming economic prospects, particularly in semi-urban and rural India. Their financing enables MSMEs to expand, hire, and invigorate local economies. A 2024 social impact study by NITI Aayog, TransUnion CIBIL, and MicroSave revealed that by December 2024, 27 million women were actively tracking their credit profiles—a 42% year-over-year increase—highlighting growing financial awareness among women entrepreneurs.

This access to credit is creating a ripple effect in underserved “tier 3” towns (populations of 20,000–50,000) and rural communities, where high service costs once discouraged traditional lenders. Additionally, NBFCs are increasingly channeling capital toward climate-smart MSME activities—such as solar power systems, water-efficient irrigation, sustainable packaging, cold chain infrastructure, and energy-efficient machinery. These investments not only align with India’s net-zero commitments but also unlock new opportunities for micro-entrepreneurs. As noted in UGRO Capital’s 2024–25 Social Impact Report, a rising share of NBFC borrowers are directing funds toward green initiatives, especially within supply chains vital to national climate objectives.

**Key Takeaways for Other Developing Economies**  

India’s NBFC-led model offers a replicable roadmap for other low- and middle-income countries facing similar MSME financing gaps.

First, digital public infrastructure has been instrumental. Systems like Aadhaar (digital ID), Udyam (MSME registration portal), and the Goods and Services Tax (GST) network have streamlined customer onboarding and credit assessment. By digitizing business transactions and compliance data, these platforms allow lenders to quickly verify key metrics—such as sales volume or tax payments—enabling faster, lower-cost lending to previously excluded businesses. Adapting even elements of this digital architecture could significantly enhance MSME financial inclusion in regions like sub-Saharan Africa, Southeast Asia, and Latin America.

Second, NBFCs are harnessing alternative data—ranging from utility bill payments and GST filings to mobile money transactions and geolocated business activity—to evaluate credit risk for MSMEs without conventional financial histories. This approach is bringing millions of “invisible” entrepreneurs into the formal economy.

Third, credit guarantee mechanisms—such as India’s Credit Guarantee Fund Trust for Micro and Small Enterprises—have effectively reduced lender risk. By covering a portion of potential defaults, these schemes allow NBFCs to extend credit to higher-risk borrowers without inflating interest rates. This risk-sharing model holds strong potential for scaling through international development partnerships.

**A Global Opportunity for Collaboration**  

As climate challenges mount, MSMEs stand at the intersection of vulnerability and opportunity—they are both exposed to environmental shocks and essential to local resilience in sectors like agriculture, logistics, energy, and manufacturing. To amplify their role, India’s NBFC-driven financing innovations must be adapted and scaled globally.

This calls for deeper cooperation among NBFCs, development finance institutions (DFIs), governments, and impact investors. While NBFCs have demonstrated their capacity to lend responsibly and reach marginalized markets, they require a stronger enabling environment—and more transparent impact tracking.

Stakeholders must move beyond conventional metrics like loan disbursement volume or repayment rates. Equally critical are indicators that reflect real-world outcomes: jobs generated, growth in women-led enterprises, and the scale of green lending.

NBFCs have already shown that inclusive finance is not only viable but highly impactful. What’s now needed is long-term, mission-aligned capital—from public agencies, DFIs, philanthropies, and private investors—that prioritizes sustainable development over quick returns. Equally essential are robust impact measurement frameworks that capture how MSME financing advances economic growth, gender equity, social inclusion, and climate resilience.

It’s time to see NBFCs not merely as financial intermediaries, but as vital development partners—and to equip them to unleash the full potential of MSMEs as catalysts for inclusive, sustainable prosperity worldwide.