India’s small businesses chase a new dawn amid reforms and financing push | Finance News
The real impact, however, will depend on how effectively these provisions are implemented on the ground. For non-banking financial companies (NBFCs), it is more about improving the quality and availability of underwriting data than simply creating additional demand for credit.
“The next phase will depend on how effectively banks, NBFCs, fintechs, credit-guarantee mechanisms and digital platforms work together. Lower cost of capital, responsible risk-based pricing and greater use of cashflow-based underwriting will be critical,” holds Ritesh Jain, cofounder of Flexiloans. As for the RBI’s co-lending norms, he says: “It should help deepen MSME credit by bringing together the strengths of banks and NBFCs.”
Banks bring capital, while NBFCs can add last-mile reach and cashflow-based underwriting. “If implemented well, this can make formal credit more accessible to thin-file MSMEs, particularly in Tier-II and -III markets, while also helping bring down the cost of capital.” Of course, the highlight of recent initiatives is the unqualified success of TReDS, and “the greater availability of transaction-level data could also support a gradual shift towards cashflow-based lending,” adds Vaheed.
We are at an inflexion point.
More than 15 years ago, the Report of the Expert Committee on MSMEs flagged that most large firms deal with MSMEs on a credit basis. Buyers do not honour invoices on time. As a result, these firms face a financial crunch. Worse, they were hamstrung: They hesitated to file complaints against large buyers, or get into legal battles to enforce contracts. What this led to, in effect, was buyers using MSMEs as financiers (the Economic Survey 2025-26 estimated that about ₹8.1 trillion was locked in delayed payments). That loophole is now shut: The MSME Act includes a 45-day payment rule, plus interest at three times the Bank Rate for delayed payments.
The TReDS ecosystem has grown significantly, facilitating more than ₹8.7 trillion in cumulative transactions by FY26. Participation has expanded and currently CPSEs, state governments, urban local bodies, municipal corporations and their vendors are benefiting from it. “The next evolution of TReDS lies in accelerating active value across the entire network,” notes Sundeep Mohindru, founder and promoter, M1xchange. “Building beyond our registered base, the core opportunity is to deepen transaction frequency, bring more MSME suppliers into active usage, and broaden financier participation to multiply liquidity.”
Add to this the RBI’s “Payments Vision 2028”. It seeks to build upon the remarkable trajectory of digital payments and improve interoperability among the TReDS platforms. This is to be watched, as it will lead to a unified ecosystem where platforms can seamlessly exchange transaction data, enabling wider access to financing. The supplier is onboarded to platform ‘A’ and the buyer on platform ‘B’. ‘A’ will share buyer details with all other exchanges; ‘B’will invite financiers to bid and share details with the supplier through ‘A’. The supplier accepts the bid on ‘A’ and financing is done on ‘B’; then ‘A’ and ‘B’ will share revenue in a pre-agreed ratio.
The defence ministry has also decided to integrate TReDS into its procurement ecosystem. For defence suppliers, who may otherwise face extended payment cycles, quicker access to working capital can help them meet operating expenses, invest in capacity and take on new orders. It also creates a model that other ministries and large public-sector buyers could consider adopting. “Greater financier participation and a common digital identity across GST, government e-marketplace, Udyam, lenders, account aggregators and TReDS can help make onboarding seamless and expand financing options for different categories of MSMEs,” says Sunil Govindarajan, executive director, Optimo Capital.
The Federation of Indian Export Organisations (FIEO) last week told Mint Road that rising freight, insurance and input costs, coupled with longer transit times and delayed payments, have increased exporters’ working-capital requirements, even for unchanged export volumes. The RBI’s Financial Stability Report (June 2026) held that the MSME sector “remains vulnerable to the impact from the West Asia conflict, although the situation currently appears contained”. The crisis continues and the new variable is the Lindsey O Graham Sanctioning Russia and Iran Act of 2026, which brings the threat of retaliatory 100 per cent tariffs on exports to the US. The hope is that the RBI will announce accommodative measures after its Monetary Policy Committee meeting ends on October 7.
“We have requested the RBI (and banks) to allow exporters additional time to identify alternative buyers and markets, divert shipments or dispose of inventory domestically,” says Ajay Sahai, director general and chief executive officer of FIEO. “Such flexibility should prevent premature crystallisation of foreign currency credit and penal charges arising solely from disruptions beyond exporters’ control.”
With the West Asia crisis expected to continue, an immediate concern is the “Draft RBI (NBFCs) credit facilities” Amendment Directions, 2026 to restrict shadow banks from offering any revolving credit product. Under this, a firm which repays ahead of schedule has to again seek a fresh limit. This costs money and time and may encourage a firm not to repay ahead of schedule even while having the wherewithal to do so. The RBI’s concern is that revolving credit is being used by some to evergreen loans. “MSME cashflows are inherently uneven. Regulation should encourage small businesses to repay when they have surplus cash, without losing access to already sanctioned credit,” notes Shachindra Nath, founder and managing director, UGRO Capital. “Allowing redraw within the original repayment schedule and maturity can reduce both indebtedness and interest costs, without creating evergreen credit.”
The Finance Industry Development Council — the self-regulatory organisation for NBFCs — has told Mint Road that where repayment extinguishes a borrower’s ability to access the repaid amount, a prudent MSME may prefer to retain the borrowing and continue paying interest merely to preserve liquidity. Permitting redraw within a fixed sanctioned amount, predetermined amortisation schedule and original maturity would, on the contrary, encourage borrowers to repay surplus funds earlier and thereby reduce their interest burden.
Ironically, this comes even as the RBI’s January 2026 co-lending norms nudge banks and NBFCs to collaborate. They cut the minimum retention requirement to 10 per cent from 20 per cent to allow NBFCs to originate larger volumes with lower balance-sheet deployment, while banks can fund a larger share of loans sourced through NBFCs.
On the whole (and this bears repetition), MSMEs are chasing a new dawn.
