Credit Pressure Persists
Micro and trading micro, small and medium enterprises remain among the most vulnerable borrowers in India's credit system, and they need more focused support from policymakers, according to Equitas Small Finance Bank Managing Director and Chief Executive Officer Vasudevan. He said the government could consider subsidising interest on loans for such businesses, a measure that would directly ease repayment pressure and improve their ability to stay afloat in a difficult operating environment.
The comments come at a time when India's MSME sector continues to serve as a critical engine of jobs, supply chains and local consumption, even as smaller firms struggle with uneven demand, working-capital stress and elevated financing costs. For micro enterprises in particular, access to credit is often constrained not only by collateral requirements but also by the cost of borrowing, which can quickly erode already narrow margins. Trading MSMEs, which depend heavily on inventory cycles and short-term liquidity, are especially exposed when interest rates remain high or cash flows turn volatile.
Vasudevan's remarks reflect a broader policy debate over how to support the smallest businesses without distorting credit markets. While large and well-documented firms may be able to absorb rate movements or tap multiple lenders, micro units frequently operate with limited financial buffers. In that context, a targeted interest subsidy could function as a bridge, helping firms maintain operations, preserve employment and continue purchasing from suppliers.
Why Targeting Matters
The emphasis on micro and trading MSMEs is significant because these segments are not always the primary beneficiaries of broad-based credit schemes. Many government and banking initiatives have improved formalisation and access to finance across the MSME landscape, but the smallest borrowers still face a disproportionate burden. Their loan sizes are modest, yet the administrative and financing costs attached to them can be high relative to revenue.
A targeted subsidy would also align with the reality that not all MSMEs face the same stress. Manufacturing firms, exporters and technology-oriented businesses may have different financing needs and stronger balance sheets than neighbourhood traders or micro units operating in fragmented markets. By focusing support on the most credit-sensitive segments, policymakers could improve efficiency and reduce the risk of subsidising firms that do not need assistance.
The banking perspective is also important. Small finance banks and other lenders serving lower-income and underbanked segments have a front-row view of repayment behaviour, cash-flow volatility and the practical barriers faced by small borrowers. Their experience suggests that affordability, not just availability, remains a central issue. If borrowing costs are reduced through a subsidy mechanism, lenders may see healthier repayment patterns and lower stress in vulnerable portfolios.
Policy Trade-Offs Ahead
Any move toward subsidising interest on MSME loans would, however, require careful design. Policymakers would need to determine eligibility criteria, loan size thresholds, sector definitions and the duration of support. Without tight targeting, such a measure could become expensive or leak toward borrowers that are not genuinely constrained. The challenge is to make support temporary, transparent and linked to productive use of credit rather than simply lowering costs across the board.
There is also a fiscal question. Interest subsidies can be effective, but they add to government expenditure and must compete with other priorities. That makes it more likely that any future support would be calibrated for the most fragile borrowers rather than offered universally. In practice, that could mean focusing on micro enterprises, traders and other small units that demonstrate genuine working-capital need and limited access to cheaper formal finance.
For the broader economy, the stakes are substantial. MSMEs account for a large share of employment and are deeply embedded in domestic supply chains. If micro and trading businesses weaken, the effects can spread quickly through local markets, affecting wholesalers, transporters, manufacturers and service providers. By contrast, even modest support can have an outsized stabilising effect when directed at firms that are close to the margin.
Vasudevan's call therefore adds to the growing case for more nuanced MSME policy. Rather than relying only on broad credit expansion, the next phase of support may need to distinguish between firms that can borrow on commercial terms and those that require temporary relief to survive. For India's smallest businesses, the difference could determine whether they merely endure or begin to grow again.