Banks Still Iffy On MSME Credit. Time To Explore Bond Market

But for A to access bank credit, it needs to have assets of more than Rs 50 crore. That’s the problem facing most of India's MSMEs. For a small company like A, it is often not possible to fulfil the requirements laid by the banks.

As liquidity shortage becomes a challenge for the MSME sector, with banks shying away from opening their purse strings to them, the bond market could come to its rescue.

RBI Takes Note

Sources said that the Reserve Bank of India (RBI), which manages the bond market, is likely to look at this issue, especially at a time when, under the existing Business Responsibility and Sustainability Reporting (BRSR) framework, companies are being pushed to move towards 'green credit', a policy that incentivises voluntary environmental actions across diverse sectors by various stakeholders, including MSMEs.

“We need to have a well-oiled bond market that caters to MSMEs. This needs to be developed with an adequate policy framework, and it will be looked at,” a government source told The Secretariat. 

Though the bond market — which allows trading of debt instruments — has been growing in India, it is still relatively untapped. And this is more so for MSMEs.

Anil Bharwaj, Secretary General, Federation of Indian Micro and Small and Medium Enterprises (FISME), said that a bond market would be particularly helpful for small firms, which have been battling myriad challenges, foremost of which is acute credit shortage.

“What will come as a big help to the MSMEs is a mechanism that allows bundling of loans through the bond market under one umbrella, and also creates a specialised market for MSME credit through this instrument,” Bhardwaj said. 

Challenges For MSME Bond Market

Creating a specialised MSME bond segment is not easy. “The key challenge is that most bonds will be unsecured,” Amarjit Chopra, former president of the Institute of Chartered Accountants of India (ICAI) told The Secretariat.

Moreover, MSMEs may not be in a position to offer higher interest rates to make them attractive. “If the interest rate is low, why should anyone go for those instruments. They will naturally explore other options,” Chopra said.

However, he added that the government needs to step in as a guarantor for the MSME bond market. “This can be a success story only if the government steps in and helps in nurturing this segment,” he said.

Finance Minister Nirmala Sitharaman has already allowed surety bonds to be accepted as a substitute for a bank guarantee for government procurements. The move has reduced the cost for suppliers and work contractors. 

Surety bonds are essentially issued by insurance companies — an assurance from insurers that in case the vendors fail to honour the contract, they will provide compensation.  

India’s Thriving Bond Market

A study jointly conducted by Assocham and ICRA shows that the outlook for bond issuances remains strong for the current financial year. It notes that the annual corporate bond issuances have doubled to Rs 10.9 lakh crore in 2024-25, from Rs 5.2 lakh crore in 2017-18. The outlook for bond issuances remains strong for FY2026, the study says.

While globally, bond markets have been facing turbulence, India's bond market has shown resilience. India's 10-year bond yield is around 6.2 per cent, driven by strong macroeconomic fundamentals and RBI rate cuts.