Left In A Bind By Banks, MSMEs Turn To Old Friends

Export credit to MSMEs remains structurally constrained, not due to lack of demand but because of inefficiencies in credit delivery.

High borrowing costs, collateral requirements, and procedural rigidities continue to affect the MSMEs.

The divergence between credit expansion and access is particularly revealing.

While outstanding MSME credit has risen to around ₹22.6 lakh crore, growing at a CAGR [Compound Annual Growth Rate] of 10.6%, the number of loan accounts has declined sharply from ₹420 lakh to ₹213 lakh. This indicates a clear concentration of credit towards larger, lower-risk borrowers, effectively constraining access for smaller exporters

— Manoj Mishra, Partner and Tax Controversy Management Leader, Grant Thornton Bharat

Meanwhile, Deepak Arnnejaa, Managing Director & CEO, Mohindra Fasteners Ltd., pointed out that the "hidden cost" of compliance often outweighs the benefits of a cheaper loan.

MSMEs often choose private or NBFC [Non-Banking Financial Company] funding as the compliance requirements are much lower. Even if the interest rates are higher, they prefer it because they can't afford or retain the expensive, skilled manpower, such as CAs and CSs, needed for traditional financial reporting

– Deepak Arnnejaa, Managing Director & CEO, Mohindra Fasteners Ltd.

Shrinking Credit Layout

Despite the unprecedented rise in geopolitical risks amid the West Asian crisis and US tariff uncertainty, India managed to register a growth in outbound shipments.

The disconnect between rising export volumes and falling credit levels is largely centred on the MSME sector. Despite the record-breaking US$824.9 billion figure, a growth of over 6% from the previous year's US$778.1 billion, bank credit to exporters has not kept pace.

Bankers and industry experts point to a "credit squeeze", wherein rigid lending norms and high collateral requirements are pushing smaller players away from the formal banking system.

Pankaj Chadha, Chairman, Engineering Export Promotion Council (EEPC) India, highlights the direct link between credit ratings and the ability to access funds.

"The MSME sector is the backbone of exports. If the credit rating is bad, then the collateral also goes up. In view of that, the MSMEs are definitely facing an issue with the rate of interest for loans as well as collateral," Chadha explained.

Reluctance To Take Loans

The reluctance to take export credit is not due to a lack of business, but rather the prohibitive cost and complexity of the loans themselves. For many small exporters, the interest rates offered by traditional banks are simply not competitive enough to maintain global margins.

This means that the MSMEs are not able to get credit at the right rates. They have to source funds at competitive rates for survival

— Pankaj Chadha, Chairman, Engineering Export Promotion Council (EEPC) India

There is no fixed policy of lending rate for MSMEs. It varies with the size of the MSME, which becomes more difficult and complex. Beyond the interest rates, the administrative burden of traditional banking acts as a significant deterrent.

Critically, nearly 70% of MSME financing needs are for working capital, but only about a quarter is met through formal channels, underscoring a persistent trade finance gap.

This underscores that export credit constraints are not merely a question of supply, but of transmission, where heightened risk aversion, elevated cost structures, and inadequately tailored financial products continue to impede effective last-mile delivery to MSME exporters, Mishra added.

Managing Liquidity Gap

If the MSMEs aren't taking bank loans, how are these businesses sustaining record-high exports? The answer lies in a combination of alternative high-cost funding and improved government efficiency.

The digitisation of tax systems has turned into an unintended lifeline for working capital.

"Benefits such as GST refunds are now arriving much faster than before. This improved speed has resolved previous liquidity challenges and is a significant help to businesses," Arnnejaa pointed out.