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On June 22, 2026 (Monday), RBI Governor Sanjay Malhotra urged banks and Non-Banking Financial Companies (NBFCs) to leverage India’s Digital Public Infrastructure (DPI) to close the persistent credit gap for Micro, Small and Medium Enterprises (MSMEs). Describing MSMEs as the country’s “entrepreneurship nursery” and a critical enabler of the Viksit Bharat 2047 vision, the Governor called for a decisive shift from collateral-based lending to flow-based, data-driven credit underwriting.
The Governor’s Message
Speaking on the role of credit in unlocking grassroots entrepreneurship, the Governor framed the MSME sector as the spine of India’s growth and employment story. His central argument was that the technology to lend smartly already exists; what is missing is its full-scale adoption by lenders.
The thrust of the message rested on three ideas:
- MSMEs are the “entrepreneurship nursery” that incubate first-generation entrepreneurs, absorb labour, and feed larger value chains.
- The credit gap is a solvable, structural problem, not an inevitable feature of small-enterprise lending.
- DPI rails make small-ticket lending viable by replacing physical collateral with verifiable digital data trails.
In short, the Governor positioned digital public infrastructure as the bridge between an underserved borrower base and the formal financial system.
What the MSME Sector Is, and the Revised Definition
MSMEs are classified under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, using a composite criterion: investment in plant and machinery (or equipment) and annual turnover. The Union Budget 2025-26 raised these thresholds substantially, with the revision notified through S.O. 1364(E) dated March 21, 2025 and effective from April 1, 2025. Investment limits were raised 2.5 times and turnover limits roughly doubled.
| Category | Investment (Plant and Machinery) | Annual Turnover |
|---|---|---|
| Micro | up to Rs 2.5 crore | up to Rs 10 crore |
| Small | up to Rs 25 crore | up to Rs 100 crore |
| Medium | up to Rs 125 crore | up to Rs 500 crore |
An enterprise is reclassified upward if it crosses the limit on either investment or turnover, but is downgraded only if it falls below the limit on both. The higher ceilings allow micro units to grow into small enterprises, and small into medium, without prematurely losing the policy benefits attached to their tier.
The Credit Gap Problem
Despite the sector’s economic weight, formal credit reaches only a fraction of MSMEs. Lenders have historically been reluctant to extend small-ticket loans because:
- Information asymmetry, many micro units lack audited financials or formal accounting records.
- High origination cost, the cost of appraising a Rs 2 lakh loan is nearly the same as appraising a Rs 2 crore loan, making small loans unprofitable under traditional models.
- Collateral dependence, borrowers without immovable property or pledgeable assets are screened out, even when their cash flows are healthy.
- Informality, a large share of micro enterprises remain outside the GST and formal documentation net.
The result is that a vast number of viable, cash-generating small businesses are starved of working capital and forced toward costly informal lenders.
The DPI Rails Explained
India’s Digital Public Infrastructure is a set of interoperable, consent-driven public digital platforms that allow a borrower’s verified data to substitute for physical collateral. The key rails the Governor named are below.
| DPI Rail | What It Does | Lending Relevance |
|---|---|---|
| Account Aggregator (AA) | Consent-based sharing of a customer’s financial data (bank statements, etc.) across institutions | Gives lenders an instant, verified view of cash flows without paper documents |
| Unified Lending Interface (ULI) | RBI-built platform (launched 2024) that pulls authenticated data from multiple sources via standardised APIs | Enables seamless, frictionless and time-bound credit delivery, especially for rural and MSME borrowers |
| Trade Receivables Discounting System (TReDS) | Electronic platform to finance MSME trade receivables (invoices) from large buyers | Unlocks working capital tied up in unpaid invoices |
| GST data trails | Digital records of an enterprise’s tax-paid sales and purchases | Provide a verifiable, hard-to-fake proxy for actual business turnover |
| Aadhaar authentication | Digital identity verification | Enables paperless, presence-less KYC and onboarding |
Together, these rails convert a borrower’s everyday digital footprint, sales, taxes, bank flows and identity, into underwritable credit information.
Unified Lending Interface (ULI)
ULI deserves particular emphasis. Launched by the RBI in 2024, it acts as a single, standardised conduit that allows lenders to access authenticated borrower data, land records, GST data, financial statements, from disparate sources through a “plug-and-play” architecture. By eliminating fragmented, manual data collection, ULI compresses loan turnaround time and brings down origination cost, the two biggest barriers to small-ticket lending.
Flow-Based vs Collateral-Based Lending
The Governor’s appeal marks a deliberate pivot in lending philosophy.
| Dimension | Collateral-Based Lending | Flow-Based (Cash-Flow) Lending |
|---|---|---|
| Basis of credit | Pledged assets (property, gold) | Verified income and transaction flows |
| Excludes | Asset-poor but cash-rich entrepreneurs | Far fewer; rewards genuine business activity |
| Data source | Physical documents, valuation | AA, ULI, GST, bank-statement analytics |
| Speed | Slow, paper-heavy | Near-real-time, digital |
| Formalisation effect | Weak | Strong; incentivises GST registration and digital records |
Flow-based lending assesses repayment capacity from the actual cash a business generates, not from what it owns. This widens the eligible borrower pool and creates a powerful incentive for formalisation: an enterprise that registers under GST and routes transactions digitally builds the very data trail that earns it cheaper, faster credit.
MSME Share of GDP, Exports and Manufacturing
The economic case for fixing the credit gap is anchored in the sector’s macro footprint (2026 data):
| Indicator | MSME Share |
|---|---|
| Share of India’s GDP | 30.1% |
| Share of India’s exports | 45.73% |
| Share of manufacturing output | 35.4% |
Outstanding bank credit to the MSME sector stood at Rs 36.79 trillion as on December 31, 2025, having grown at roughly a 15% compound annual growth rate (CAGR) over five years. While this growth is healthy, the Governor’s point is that the sector’s contribution to output and exports still outpaces its access to formal finance, leaving headroom that DPI can unlock.
Analysis and Way Forward
The Governor’s intervention reframes MSME credit as a problem of information, not risk. When lenders can see a borrower’s verified cash flows, the perceived riskiness of small loans falls sharply, and DPI is precisely the apparatus that makes those flows visible.
The way forward rests on several pillars:
- Scale ULI adoption so that flow-based underwriting becomes the default for new-to-credit and micro borrowers, not a niche product.
- Deepen GST formalisation to expand the pool of enterprises with credible digital data trails.
- Strengthen TReDS participation by mandating larger buyers and government bodies to onboard, freeing MSME working capital trapped in receivables.
- Embed consumer protection around the Account Aggregator consent framework, so that data-sharing remains genuinely voluntary and secure.
- Build lender capability in cash-flow analytics so banks and NBFCs can price risk from data rather than retreat to collateral.
If executed well, this model can simultaneously widen credit access, accelerate formalisation, and channel finance into the segment that delivers the highest employment per rupee, a direct contribution to the Viksit Bharat objective.
UPSC Relevance
- GS Paper 3 (Economy), financial inclusion, banking sector reforms, role of NBFCs, and the priority-sector lending logic behind MSME credit.
- Digital Public Infrastructure, AA, ULI, TReDS and GST as exam-relevant building blocks of “India Stack”; understand consent architecture and interoperability.
- MSME policy, the revised April 2025 classification, composite investment-cum-turnover criterion, and reclassification rules are high-yield Prelims facts.
- Prelims linkages, ULI is an RBI initiative (2024); Account Aggregator operates under RBI’s NBFC-AA framework; TReDS is an RBI-regulated platform.
- Mains angle, “Discuss how Digital Public Infrastructure can transform MSME credit and drive formalisation of India’s informal economy.”
Facts Corner
- Outstanding MSME bank credit: Rs 36.79 trillion (as on December 31, 2025); ~15% five-year CAGR.
- MSME share of GDP: 30.1%.
- MSME share of exports: 45.73%.
- MSME share of manufacturing output: 35.4%.
- RBI Governor: Sanjay Malhotra (remarks on June 22, 2026).
- DPI tools for MSME credit: Account Aggregator (AA), Unified Lending Interface (ULI), Trade Receivables Discounting System (TReDS), GST data trails, Aadhaar authentication.
- ULI: launched by the RBI in 2024 for seamless, data-driven credit delivery.
- Revised MSME definition: effective April 1, 2025; Micro (investment up to Rs 2.5 cr, turnover up to Rs 10 cr), Small (up to Rs 25 cr / Rs 100 cr), Medium (up to Rs 125 cr / Rs 500 cr).
- Lending shift: flow-based / cash-flow-based lending replacing collateral-based lending to drive formalisation.
Sources: Reserve Bank of India, Business Standard, Press Information Bureau
Source: RBI Pushes Digital Public Infrastructure to Close the MSME Credit Gap — Ujiyari.com | Free UPSC & State PCS Current Affairs
