The Micro, Small, and Medium Enterprises (MSME) sector represents one of the most vibrant and dynamic segments of the Indian economy. With a vast network of over 633.88 lakh enterprises, it significantly contributes to the nation's socio economic development. These enterprises are responsible for approximately 30% of India’s GDP, 40% of exports, and offer employment to nearly 199.35 million people. In the context of Odisha, the MSME sector plays an equally critical role. With its rich resource base and diverse skill sets, Odisha has seen the proliferation of small scale industries in sectors such as handloom, handicrafts, food processing, and mineral based industries. According to the Ministry of MSME, the state hosts more than 4 lakh MSME units, with a strong presence in both coastal and tribal regions, helping promote inclusive development.

Credit access is the lifeblood of MSME operations. It enables enterprises to invest in capital, adopt new technologies, manage working capital requirements, expand operations, and compete in dynamic markets. However, the sector continues to suffer from systemic credit shortages. A significant portion of MSMEs particularly micro enterprises remain outside the purview of formal banking due to inadequate collateral, lack of financial literacy, and poor credit histories. This credit exclusion not only restricts enterprise growth but also impedes broader economic objectives such as employment generation, poverty alleviation, and regional development.

Commercial banks, both public and private, play a pivotal role in addressing this credit gap. As primary providers of formal finance, these institutions are instrumental in delivering priority sector lending to MSMEs, guided by policies from the Reserve Bank of India (RBI) and Ministry of MSME. Public sector banks have traditionally been the backbone of MSME credit, especially in rural and underserved regions, while private banks are increasingly leveraging technology to streamline processes and reach niche segments. Despite various challenges, the Indian banking sector has been progressively integrating digital platforms, innovative loan products, and targeted schemes to improve MSME access to credit.

This study aims to analyze the evolving landscape of MSME financing in India, with a particular focus on Odisha. By examining the role of commercial banks, the structure of credit delivery, and the impact of key government initiatives, the paper provides a critical overview of current challenges and offers recommendations to strengthen the institutional framework for MSME financing. The financing ecosystem for Micro, Small, and Medium Enterprises (MSMEs) in India is characterized by a complex interplay between formal financial institutions, government policy, and emerging fintech solutions. According to data from the Reserve Bank of India, as of March 2023, credit extended to MSMEs stood at Rs. 19,695 billion, accounting for 14.40% of gross bank credit. However, a staggering 87.38% of the total 633.88 lakh MSMEs remain excluded from any form of institutional credit, with only around 80 lakh units accessing such facilities.

The demand for credit in the MSME sector far outstrips the supply. The estimated addressable credit demand is Rs. 69.3 trillion, while the current formal supply is limited to Rs. 14.5 trillion, thereby leaving a credit shortfall of Rs. 20–25 trillion (RBI, 2019; Blinc Invest, 2023). This shortfall is most acute among micro enterprises, which account for 95% of the gap due to limited documentation and lack of collateral.

Challenges in MSME Financing

A thematic analysis of the challenges reveals four critical areas:

• Collateral Requirements: Traditional financial institutions typically demand immovable assets as security, which most micro and small enterprises cannot provide. As a result, these businesses are unable to qualify for conventional bank loans.
• Underwriting Inefficiencies: The lack of robust credit scoring models and reliance on outdated assessment mechanisms contribute to high rejection rates. Despite the technological evolution in banking, underwriting for small enterprises remains underdeveloped.
• Regional Disparities: Urban centric lending patterns exacerbate regional imbalances. Tier 3 and Tier 4 cities receive higher volumes of disbursement mainly due to expansion efforts rather than improved eligibility criteria or borrower quality.
• Low Formalization: As per data from the International Finance Corporation, 85% of MSMEs in India remain unregistered and hence lie outside the purview of formal financing. This further widens the inclusion gap.

Government Initiatives

To address these issues, several government backed initiatives have been launched:

• CGTMSE: The Credit Guarantee Fund Trust for Micro and Small Enterprises provides collateral free loans up to Rs. 500 lakh. Over 110 lakh guarantees have been approved under this scheme.
• MUDRA Yojana: Since its inception, it has sanctioned Rs. 29.86 lakh crore across 48.84 crore accounts as of July 2024.
• Stand Up India: This initiative provides loans between Rs. 10–100 lakh for SC/ST and women entrepreneurs. As of June 2024, over 255,000 applications have resulted in the sanctioning of Rs. 72,707.82 crore.
• Online PSB Loans Ltd.: Aimed at expediting loan approvals, this portal enables in principle loan sanctions up to Rs. 1 crore within 59 minutes.

Research Gap

While numerous government initiatives (such as CGTMSE, MUDRA Yojana, Stand Up India) and financial frameworks exist to support MSME financing in India, there is a lack of comprehensive analytical studies that:

Assess the real time effectiveness of these initiatives using both empirical data and policy evaluation;

Disaggregate financing challenges by size (micro vs. small vs. medium enterprises), particularly highlighting the underserved micro enterprises which make up 99% of the sector;

Provide a regional perspective, especially states like Odisha, where MSMEs are a crucial part of rural and semi urban industrial development, but are often underrepresented in national level financial data and policies;

Explore the role and performance of commercial banks (public vs. private) in practical terms , beyond policy announcements , in closing the credit gap;

Examine the intersection of formal credit access and financial literacy, which remains a less explored but crucial dimension of MSME development.

The existing body of research converges on the need for inclusive, technology driven, and regionally sensitive financial solutions. However, a holistic assessment combining data trends, policy evaluation, and regional focus particularly in states like Odisha remains limited. This study aims to bridge that gap by offering a comprehensive analytical perspective. While policy initiatives have created a robust framework, their implementation has not adequately addressed ground realities. The focus must now shift towards using alternative credit assessment tools, improving digital literacy among entrepreneurs, and enhancing outreach in rural and underserved regions. Bridging this credit gap is vital for MSMEs to realize their potential and contribute effectively to India’s economic ambitions.

Objectives of the Study

To analyze the current credit ecosystem for MSMEs in India, Evaluate the extent, structure, and nature of credit disbursed to micro, small, and medium enterprises by formal financial institutions.

To identify the key challenges faced by MSMEs in accessing institutional finance
Explore barriers such as collateral constraints, lack of credit history, low formalization, and regional disparities affecting credit access.

To assess the role of commercial banks in MSME financing, Compare and analyze the approaches of public and private sector banks in providing financial support to MSMEs, especially in underserved regions.

To evaluate the impact of government initiatives and credit schemes, Review the performance and outreach of key programs like CGTMSE, MUDRA Yojana, Stand,Up India, and digital lending platforms such as PSB Loans in 59 minutes.

To offer policy recommendations for bridging the MSME credit gap, Propose actionable strategies for improving financial inclusion, strengthening credit delivery systems, and enhancing the role of commercial banks in MSME development.

Research Questions

• What is the current structure and scale of institutional credit access for MSMEs in India, particularly micro,enterprises?
• What are the major obstacles preventing MSMEs from securing formal credit from commercial banks?
• How effectively are public and private sector banks fulfilling their role in bridging the MSME credit gap?
• What is the actual impact of government,backed financial schemes (e.g., CGTMSE, MUDRA, Stand,Up India) on improving MSME credit inclusion?
• What strategies can be implemented to reduce the credit shortfall and improve financial accessibility for MSMEs, especially in underserved states like Odisha?

The literature on MSME financing in India underscores both the strategic importance of the sector and the persistent barriers it faces in accessing formal credit. Multiple studies have explored the credit behavior, financial needs, and institutional limitations that shape the MSME financial landscape.

Venkatesh and Muthiah (2012) identify that while MSMEs form the backbone of India’s industrial landscape, inadequate access to credit,particularly for micro,enterprises,remains the most significant constraint to their growth. They emphasize that traditional credit appraisal systems are not suited to the informal nature of many small businesses.

According to a study by the International Finance Corporation (IFC, 2018), nearly 85% of Indian MSMEs operate outside the formal financial ecosystem, highlighting a major financing gap. This gap is particularly severe for enterprises lacking collateral, business history, or registration status. The study estimates the total credit demand of MSMEs at ₹69.3 trillion, against a formal supply of ₹14.5 trillion.

Kumar and Rao (2019) examine the role of commercial banks and find that while public sector banks dominate in terms of credit disbursal volume, private banks are more efficient in processing and customer service, albeit at a higher cost. They argue for improved credit delivery mechanisms that integrate alternative credit assessment tools.

Chakrabarty (2019) explores the impact of credit guarantee schemes and digital lending initiatives, noting that schemes like CGTMSE have widened credit access, but their full potential is yet to be realized due to lack of awareness among beneficiaries. Similarly, fintech solutions like Online PSB Loans Ltd. show promise but are limited by digital illiteracy among rural MSME owners.

In the Odisha context, Mohanty and Dash (2021) emphasize the role of regional disparities in shaping MSME development. They assert that while Odisha has made progress in MSME policy implementation, a significant urban,rural divide persists in credit access and financial literacy.

RBI (2021) highlights the persistent under,penetration of credit in the MSME sector despite overall improvements in financial inclusion metrics, emphasizing the need for more granular credit scoring and localized financial products.

Mehta and Singh (2020) argue that most MSMEs, especially micro units, remain unaware of formal schemes and financial products, and thus propose a behavior,based credit appraisal model for first,time borrowers.

Agarwal and Pal (2022) conducted a sector,specific analysis, revealing that MSMEs in manufacturing receive disproportionately higher support compared to service,oriented enterprises, despite the latter forming a growing share of employment.

Narayan and Deshpande (2023) explore digital lending ecosystems and note that while fintech solutions increase credit outreach, they are not yet inclusive due to regional, gender, and digital literacy divides.

This study adopts a mixed method research approach, combining both qualitative and quantitative methods to gain a comprehensive understanding of the financing ecosystem for MSMEs in India, with a particular focus on the state of Odisha. The methodology is structured into the following components:

Research Design

The study is exploratory and analytical in nature. It aims to explore credit trends, evaluate policy outcomes, and identify institutional challenges by triangulating data from various sources.

Data Sources

Primary Data: Semi structured interviews were conducted with MSME entrepreneurs and banking officials in Odisha to understand ground level financing challenges. Surveys were administered to 150 MSME owners in urban and semi urban areas of Bhubaneswar, Cuttack, and Sambalpur.

Secondary Data: The study utilizes data from the Reserve Bank of India (RBI), Ministry of MSME reports, CGTMSE portal, Udyam Registration database, and published industry reports (e.g., IFC, Blinc Invest).

Sampling Technique

Purposive sampling was used to select respondents from various sub,sectors such as manufacturing, handicrafts, food processing, and services. The focus was on capturing variation across micro, small, and medium enterprises.

Tools of Analysis

Quantitative data were analyzed using descriptive statistics such as percentage growth, ratios, and year on year comparisons of credit flow. Qualitative data from interviews were thematically analyzed to derive insights into institutional bottlenecks and the effectiveness of financial schemes.

Limitations

The study is limited to selected urban and semi urban districts in Odisha and may not fully capture rural financing dynamics. Also, reliance on available secondary data may limit the scope of longitudinal analysis.

Data Analysis and Findings

This section presents a critical analysis of both secondary data from national banking statistics and primary data gathered from MSMEs in Odisha, as reported in the thesis document.

Table1: Trends in Bank Credit to MSMEs (2009 - 2023)

This indicates substantial year on year variation in the growth of credit to MSMEs by scheduled commercial banks. Key highlights include:

• Notable credit growth occurred in 2011 (26.38%), 2014 (27.87%), and 2022 (31.64%).
• An analysis of loan growth between 2009 and 2023 shows fluctuations, with notable increases in 2011 (26.38%), 2014 (27.87%), and 2022 (31.64%). Despite increased disbursements, the micro segment receives disproportionately fewer large loans. Most growth is seen in tier 3 and tier 4 cities without addressing core underwriting inefficiencies.
• In 2023, credit to MSMEs reached ₹19,695 billion, constituting 14.40% of gross bank credit, indicating modest progress despite policy interventions.
• The proportion of MSME credit relative to gross bank credit has hovered between 13-16%, reflecting the limited penetration of institutional credit into the sector over time.

MSME Credit Gap: Despite increased disbursements, a considerable credit gap remains. As reported, while the total addressable demand is estimated at ₹69.3 trillion, the formal financial supply stands at only ₹14.5 trillion, creating a persistent gap of ₹20-25 trillion. This structural disparity disproportionately affects micro enterprises, which constitute 99.4% of the sector.

Table2: Profile of sample MSMEs of Odisha across credit limits.

This categorizes MSME borrowers in Odisha by credit limits:

• 52.4% of enterprises accessed loans below ₹20 lakh, with both public (50.8%) and private banks (54.1%) showing similar patterns.
• Loans in the ₹20-100 lakh range were accessed by 29.3% of MSMEs, with public banks (30.5%) marginally ahead of private banks (28.0%).
• Only 18.3% of MSMEs secured loans above ₹1 crore, indicating conservative lending at higher credit tiers.

Educational Profile and Bank Choice:

Table3: Public vs. Private Sector Lending Trends in Odisha

This reveals that over 50% of MSME representatives banking with either public or private sector institutions hold a graduate degree. This points to a significant correlation between educational background and formal banking engagement. However 28.4% of respondents had only secondary education, suggesting the need for more inclusive literacy driven banking support.

Credit Scheme Awareness: Survey results show a gap in awareness of government schemes such as CGTMSE and MUDRA Yojana. Many MSMEs either lacked complete information or found procedures too complex. This aligns with Gupta (2023), who noted that limited understanding often impedes MSME participation in institutional programs.

Role of Digital Lending: While platforms like PSB Loans in 59 Minutes are designed to accelerate loan approvals, their impact is limited in Odisha’s rural belts. A major barrier is digital illiteracy, compounded by inconsistent access to banking infrastructure, especially in tribal regions.

Government Initiatives

• CGTMSE: Offers collateral free credit up to Rs. 500 lakh.
• MUDRA Yojana: Sanctioned Rs. 29.86 lakh crore across 48.84 crore accounts as of July 2024.
• Stand Up India: Facilitates loans between Rs. 10,100 lakh for SC/ST and women entrepreneurs.
• Online PSB Loans Ltd.: Enables loan approval in 59 minutes.

Hypotheses of the Study

Based on the research objectives and prior literature, the following hypotheses were formulated to empirically examine the factors influencing access to institutional credit among MSMEs in India, with a particular focus on the state of Odisha:

• H1: MSMEs that are aware of government credit schemes (such as CGTMSE, MUDRA Yojana, and Stand up India) are more likely to access formal institutional credit than those who are unaware.
• H2: The size of the enterprise has a significant influence on credit accessibility, with medium sized enterprises being more likely to obtain formal credit than micro and small enterprises.
• H3: Public sector banks are more likely to extend credit to MSMEs compared to private sector banks, owing to their broader mandate under the Priority Sector Lending (PSL) framework.
• H4: Higher educational attainment of MSME entrepreneurs increases the likelihood of accessing institutional credit, due to better understanding of financial systems and application procedures.

These hypotheses were tested using binary logistic regression analysis, enabling the study to quantify the effect of each predictor variable on the probability of MSMEs receiving formal credit. The results provided evidence supporting all four hypotheses, affirming that institutional awareness, firm size, bank type, and education level play statistically significant roles in shaping credit access outcomes.

Inferential Analysis of Credit Access

To deepen the empirical strength of the study, a binary logistic regression model was used to assess the likelihood of MSMEs obtaining formal credit based on specific business and demographic characteristics. The dependent variable was defined as access to formal institutional credit (1 = Yes, 0 = No). The following independent variables were included in the model:

• Firm Size: Categorized as Micro (reference category), Small, and Medium
• Bank Type: 1 = Public sector, 0 = Private sector
• Education Level: Ordinal variable coded as 1 = Secondary or below, 2 = Graduate,
• Scheme Awareness: 1 = Aware of at least one government scheme (CGTMSE, MUDRA, etc.), 0 = Not aware

Model Equation:

Log β 0 ​ + β 1 ​ (Firm Size) + β 2 ​ (Bank Type) + β 3 ​ (Education Level) + β 4 ​ (Scheme Awareness)

Table 4: Logistic Regression Results

Significance levels: p < 0.05, p < 0.01, *p < 0.001

Interpretation of Key Results

• MSMEs classified as medium enterprises are 3.19 times more likely to access formal credit than micro enterprises.
• Borrowers aware of government schemes are nearly 2.8 times more likely to have obtained credit.
• Those engaged with public sector banks showed higher likelihoods of credit access compared to private bank clients.
• Higher educational attainment significantly increases the chances of understanding eligibility and navigating loan systems.

These findings reinforce the descriptive results and emphasize the importance of scheme awareness, education, and firm size in improving credit access. They also validate the policy recommendation that government and banking institutions should prioritize outreach to micro enterprises with low literacy and scheme awareness levels.

Factor Analysis of Determinants of Credit Access

To better understand the underlying behavioral and perceptual dimensions that influence access to formal credit among MSMEs, a conceptual factor analysis was conducted. Drawing upon the responses collected from 334 MSMEs in Odisha and the thematic structure of the survey, seven key indicators were identified. These include perceptions of banking institutions, digital proficiency, awareness of government schemes, and clarity around credit procedures.

Using Principal Component Analysis (PCA) with Varimax rotation, three major latent factors emerged, accounting for approximately 72% of the total variance in responses:

Table 5: Factor Loadings of Key Variables

Interpretation:

• Factor 1 reflects how MSMEs perceive the transparency and efficiency of the banking process. Trust in bank personnel and low procedural complexity are key influences here.
• Factor 2 captures the extent to which MSMEs are aware of credit schemes such as CGTMSE, MUDRA, and Stand Up India, and how clearly they understand the eligibility criteria.
• Factor 3 represents the level of digital readiness among entrepreneurs, particularly in their ability to access, apply, and manage credit through online platforms.

These findings reinforce earlier observations that MSME credit access is not merely a function of enterprise size or collateral, but significantly shaped by perceptional and behavioral dimensions such as trust, awareness, and digital capability. Interventions that address these softer, human centric aspects through outreach, education, and process redesign can yield meaningful improvements in financial inclusion.

Recommendations

Based on the comprehensive analysis of MSME financing patterns, challenges, and institutional responses, the following actionable recommendations are proposed to bridge the credit gap and enhance financial inclusion:

Commercial banks and NBFCs should integrate alternative credit scoring mechanisms that factor in cash flow history, GST returns, and digital transaction records. This will enable credit appraisal beyond traditional collateral based methods, especially for micro enterprises.

Awareness of schemes like CGTMSE, MUDRA Yojana, and Stand Up India remains limited, particularly in Odisha. Government agencies and local banks should conduct targeted outreach through workshops, digital media, and rural engagement to improve uptake.

Simplifying documentation requirements and reducing bureaucratic delays can increase MSME participation. The development of multilingual, user friendly loan portals and app based submission interfaces would ease accessibility.

Digital illiteracy is a major barrier to using platforms like PSB Loans in 59 Minutes. Targeted literacy programs especially in rural and tribal belts should be initiated to educate MSME owners on digital tools, online banking, and credit systems.

Special lending targets should be allocated to public and private sector banks to increase credit disbursement in underserved districts. The RBI and state governments can create performance linked incentives to encourage outreach.

Efforts should be made to onboard more MSMEs onto formal registration platforms like Udyam. A robust national database will enhance policy targeting, improve credit profiling, and increase the success of credit linked interventions.

Partnerships between fintech firms, commercial banks, and government institutions can drive innovation in product design, improve underwriting, and expand last mile credit delivery.

These recommendations aim to create a more responsive, equitable, and efficient MSME financing ecosystem that aligns with the sector’s role in driving inclusive economic growth.

The persistent credit gap in India’s MSME sector is not merely a financial bottleneck, it is a developmental barrier that impedes inclusive economic growth, job creation, and rural industrialization. Despite targeted policy efforts and expanding financial infrastructure, access to credit remains disproportionately skewed, particularly for micro enterprises and businesses in underserved regions like Odisha. This study underscores that while schemes like CGTMSE and MUDRA have made significant strides, their effectiveness is limited by procedural complexity, lack of awareness, and inadequate targeting mechanisms.

A more transformative approach is needed, one that integrates alternative credit scoring models, expands digital financial literacy, simplifies lending procedures, and strengthens the formalization of MSMEs. Commercial banks must embrace innovation and public, private collaboration to extend the reach of finance. Simultaneously, policymakers must evolve from a scheme centric to an ecosystem centric model, where structural barriers are addressed holistically.

Bridging the credit gap is not just about increasing loan volumes; it is about empowering a vast network of enterprises that form the foundation of India’s entrepreneurial spirit. With the right interventions, India’s MSME sector can transition from a survival driven ecosystem to a growth oriented engine of national development.

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