MC EXCLUSIVE Budget 2026: Govt may unveil measures for faster, cheaper credit to MSMEs

The average interest rate for MSME loans typically ranges from 8-18% per annum.

Enhancing credit availability and lowering borrowing costs for micro, small and medium enterprises (MSMEs) are likely to be the focus areas of the Union Budget for FY27, senior government officials told Moneycontrol.

According to the officials, finance minister Nirmala Sitharaman may unveil measures that to reduce turnaround time for MSME loans. The Budget may also introduce an interest subvention scheme, which would subsidise a part of the interest the MSMEs will have to pay on fresh or incremental loans.

"These are ongoing discussions, as supporting MSMEs is a priority of the government," a government official said. "The documentation process for accessing credit is lengthy for MSMEs, and even after that, many MSME units don’t get loans approved."

"Banks seek primary security, collaterals, and even at times personal guarantee before granting loans to MSMEs," a second official said. “This causes delay in receiving loans.”

The government is examining suggestions on creating a clear framework for documents required for accessing credit, the officials said.

The MSME challenge

Sarvadnya Kulkarni, CEO, General Instruments Consortium, a Mumbai-based MSME, said turnaround time reduces when credit assessment shifts from collateral-based to data-based.

“Connecting GST, ITR (Income Tax Return) and bank data through a unified digital scoring system and enabling pre-approved working capital lines can bring loan approval down to a few days,” he added.

On the interest subvention scheme, officials that it’s not yet clear, whether the plan, when introduced, will be applicable on credit availed from both non-banking financial companies (NBFCs) and banks or either of the two.

In 2018, the government introduced a similar scheme, which was operational till March 31, 2021. The scheme offered an annual 2 percent interest subvention (subsidy) on fresh or incremental working capital loans, capped at a maximum credit amount of Rs 1 crore per MSME.

The new scheme may increase the credit limit, keeping the subsidy rate unchanged, the officials said.

According to IIFL Finance, the average interest rate for MSME loans typically ranges from 8-18 percent. It fluctuates based on the lender (banks, NBFCs), loan type (term, working capital), and borrower profile.

Since MSMEs pay a much higher cost of borrowing than large firms due to collateral requirements and higher perceived risk, a targeted subvention scheme can level the field, experts say.

Instead of subvention, the focus should be on providing credit refinancing facilities to the MSME ecosystem, say others.

“Credit refinancing will help the broader banking system to take meaningful credit risks and, in the process, understand the MSME ecosystem better,” said Vivek Iyer, partner and financial services risk advisory leader, Grant Thornton Bharat.

The government can also create a special liquidity fund to help MSMEs tide over external market stresses beyond that impact their liquidity situations, he said.