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The Indian government, in collaboration with regulatory bodies like the Reserve Bank of India (RBI), is taking a multi-faceted approach to expand credit for banks and Micro, Small, and Medium Enterprises (MSMEs). This approach involves policy support, innovation in lending models, and reinforcement of credit guarantee mechanisms.
In the case of expanding bank credit, leading institutions like the State Bank of India (SBI) aim to grow their loan books by approximately 12% in 2025, while maintaining a healthy asset quality. SBI's capital base is strengthening through internal accruals and planned equity raises, including partial stake sales, to support further credit expansion. However, credit growth in FY25 has slowed to around 9%, down from nearly 20% previously, indicating a tightening in the credit environment. This slowdown is due to regulatory clampdowns on unsecured personal loans and microfinance, and a need for balanced measures to boost consumption and credit demand across urban and rural segments.
For MSME lending, the government and banks are focusing on several strategies. The substantial credit gap (approximately 24%) in this sector is primarily due to the informal nature of many MSMEs, which often lack audited financials or collateral, making traditional credit underwriting challenging. To address this, the government and banks are emphasizing digital footprint- and cash-flow-based lending models, credit guarantee schemes, MSME formalization efforts, expanding priority sector lending mandates, and increased participation from Non-Banking Financial Companies (NBFCs).
Digital footprint-based lending innovations are a key part of this strategy. Banks are moving towards cash-flow assessment driven by digital data rather than relying solely on collateral or credit history. This alternative underwriting enhances credit access for viable but underserved enterprises with limited traditional credit histories. Technological upgrades in lending platforms and initiatives like Axis Bank’s Bharat Banking focus on expanding deep rural and semi-urban outreach with fast, seamless, unsecured digital loans.
In summary, the Indian government and regulators are supporting credit expansion for banks through capital and policy measures, while MSME lending is being bolstered by formalization efforts, digital data-driven credit models, enhanced credit guarantees, and increased NBFC participation. However, structural barriers such as fragmented data consent systems and informal MSME operations remain challenges to be addressed for scaling inclusive credit access. The ecosystem is adapting with a blend of regulatory, technological, and financial innovations to meet these needs in the current economic landscape.
- The expansion of the finance industry, particularly banking, is being driven by the Indian government's multi-faceted approach, which includes policy support, innovation in lending models, and reinforcement of credit guarantee mechanisms.
- Leading institutions like the State Bank of India (SBI) are aiming to grow their loan books by approximately 12% in 2025, while maintaining a healthy asset quality, as part of the plan to expand finance and credit.
- The digital revolution is playing a significant role in this expansion, with banks moving towards digital footprint- and cash-flow-based lending models for more inclusive credit access.
- The economy's market, including businesses, personal finance, banking and insurance, and fintech, is undergoing a transformation through such Defi and technological innovations, ensuring credit growth for sectors like MSMEs.
- Non-Banking Financial Companies (NBFCs) are also playing a crucial role in this expansion, particularly in the lending to the Micro, Small, and Medium Enterprises (MSME) sector.
- Despite the progress made in expanding credit, challenges such as fragmented data consent systems and informal MSME operations persist, necessitating further regulatory, technological, and financial innovations for a scalable and inclusive credit access.
