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MSME: According to an Axis Bank research, lending to micro, small, and medium-sized businesses (MSMEs) has been a major factor in the growth of bank loans in recent years, helped by robust legislative measures, government-backed credit guarantees, and more formalization via the Udyam registration system.

According to the research, MSMEs accounted for 22% of additional non-food bank credit in FY25, increasing their overall share of non-food credit to 18%. This underscores the segment’s increasing significance in India’s banking sector.

Lower interest rates, government credit-loss guarantees, and banks’ growing use of technology-driven, data-based underwriting have all contributed to the continuous expansion in MSME lending.

It said “MSME credit drives loan expansion, aided by government-led guarantees and initiatives to increase registration (Udyam)” .

According to the research, government-led credit guarantee programs have been essential in boosting lenders’ trust and increasing small firms’ access to financing.

According to the report’s findings, MSME credit guarantee coverage has significantly improved since FY21. As a result of the rapid growth of coverage, the number of guarantees increased from over 5.2 million in FY21 to over 10 million by December 2024.

The total amount authorized under credit guarantees rose from around Rs 2.6 trillion until FY21 to approximately Rs 8.1 trillion until December 2024, in tandem with the growth in the number of guarantees.

This notable increase shows deeper penetration of formal lending across sectors, greater ticket sizes, and more engagement by MSMEs.

More businesses have entered the formal system as a result of the governmental push and initiatives to boost MSME registration via the Udyam portal.

Increased registration has made data more accessible and transparent, enabling banks to extend lending to small and first-time customers and enhance creditworthiness assessments.

The dramatic decline in interest rates, which has lowered borrowing costs and encouraged businesses to apply for formal loans, has been another important driver boosting MSME credit development. loan-loss guarantees and lower rates have improved loan flow, particularly for micro and small businesses, and reduced lender risk.

Additionally, banks have embraced data-driven underwriting more and more, evaluating borrowers using alternative data sources like utility bill payments and GST reports.

Faster credit evaluation, less reliance on conventional collateral, and better access for smaller businesses that may not have long financial histories have all been made possible by this change.

Overall, the research said that the flow of credit to MSMEs has been reinforced by the mix of technology-led lending, government-backed guarantees, formalization via Udyam, and policy assistance.