MSME Credit Gap.
How does a country with no shortage of capital, and no shortage of borrowers, still have a â¹25 lakh crore credit gap that refuses to close?
It is a question that is two thousand years older than it looks.
Chanakya placed the lender alongside the physician and the king as a pillar without which civilisation cannot stand. Not the merchant. Not the soldier. The lender. He understood what modern MBA programmes sometimes forget: the person who decides where capital flows decides where civilisation grows. The banker was never a clerk processing forms. The banker was always an architect of possibility.
That ancient role is being tested today by a very modern question.
The â¹25 lakh crore question every Indian banker is being asked
India's MSMEs need an estimated â¹25-30 lakh crore in credit. That number has barely shifted for a decade. The country is not short of capital. It is not short of borrowers either. Then why does the gap refuse to close? That is the real â¹25 lakh crore question. And the answer is being assembled in the quietest corner of Indian banking.
I spent fourteen years in the credit rooms of India's leading private banks. Year after year I watched the same scene. Whether the borrower was a textile-unit owner in Surat or a SaaS founder in Bengaluru, his file always arrived as the same thick stack of paper. A relationship manager would spend an entire working day distilling it into a Credit Appraisal Memo. The file then travelled. Risk, legal, treasury, compliance. By the time a sanction reached the borrower in Meerut or Madurai, the working capital need that had set it off was usually long behind him.
Who paid for that delay? The owner whose ten daily-wage workers had to be told to come back next week. The woman entrepreneur sitting on next month's order with no money for raw material. The first-time founder whose runway was three months while the bank's process needed two. Many gave up before the sanction ever arrived. That was not paper-burden. It was the weight of dreams that wilt with time.
How artificial intelligence is rewriting credit underwriting in India
That world is now quietly ending. A new generation of credit intelligence platforms, built mostly by Indian engineers and ex-bankers, has collapsed that eight-to-twelve-hour appraisal into under an hour. The banking system itself has become the laboratory. SBI's YONO Business, HDFC's SmartHub Vyapar, Bajaj Finance, and fintech-lenders like Lendingkart and Kinara Capital now underwrite small-business credit in minutes, not days. The Reserve Bank's Account Aggregator framework supplies the missing piece: consent-driven access to bank-statement and GST data in a single standard format.
The state has noticed. Budget 2024 raised the Mudra Yojana ceiling to â¹20 lakh and announced a fresh credit-guarantee scheme for manufacturing MSMEs without collateral. Finance Minister Nirmala Sitharaman framed it as a structural step. In August 2024, then-RBI Governor Shaktikanta Das unveiled the Unified Lending Interface and called it transformative the way UPI has been for payments.
Through my advisory work at Funding Sherpa, I have spent the last two years watching this shift play out from the borrower's side of the table. The pattern is unmistakable. The more digital and transparent a small business is, the more rapidly the new credit engines say yes. A textile owner in Bhiwandi who could not secure a working-capital sanction in 2022 was offered three competing term sheets in 2026 - same business, same promoter, with a cleaner digital trail. The founder whose ARR sits cleanly on a SaaS dashboard now receives a venture-debt term sheet inside a week. The lesson for any MSME or startup owner reading this is simple: invest in the legibility of your numbers before you invest in the pitch.
The Sherpa, not the gatekeeper
The metaphor I keep returning to is that of the Sherpa. Every business that needs capital is a climber on its own slope. For some it is working capital. For others it is equity. For most it is both, at different altitudes. What every climber has always needed is the same: a guide who knows the route, the wrong turns, and the paths that look short but lead nowhere. That role has belonged to bankers since the first credit committee met. Artificial intelligence does not replace the Sherpa. It sharpens him.
Three fears for India's AI lending revolution
But three fears travel alongside this optimism. The first is bias. An engine trained on yesterday's lending data tends to freeze yesterday's exclusions into tomorrow's decisions - exclusions that have repeatedly penalised first-time founders, women-led MSMEs, and borrowers outside the metros. The second is explainability. A machine's decision must remain defensible to a regulator, an auditor, and to the borrower whose loan it shapes. The third, and largest, is the least discussed. If this revolution stays bottled within the prime-borrower tier, if the small manufacturer in a tier-3 town and the woman entrepreneur scaling a growing business remain outside the file, the â¹25 lakh crore gap sits frozen for another decade. Many businesses that are waiting to be born remain unborn.
In my book "What Bankers Whisper", I argue that the real curriculum of corporate banking is what bankers do not write down - the pattern recognition, the institutional memory, the corridor whisper that separates the banker who survives three credit cycles from the one who does not survive one. AI is now being asked to capture that unwritten curriculum at scale. Whether it does so fairly will define whether India's small-business economy gets the credit it deserves.
I still believe this revolution will not stall. For the first time, the three forces that matter most - policy, competitive pressure, and a changing entrepreneurial generation - are pushing in the same direction.
The route is still the banker's to mark
Chanakya's larger point still stands. The technology now changes the rope. The route is still the banker's to mark. Every business climbing the slope of working capital, or scaling the face of equity, will still need what it has always needed - a guide who has walked the route before.
For a country that has spent a decade asking whether its small businesses and first-time founders can really be banked, this may finally be the answer arriving. Without announcement, but with the quiet certainty of an ancient role being renewed for a new age.
About the author: Ashish Agarwal is a strategic financial consultant and author. He spent fourteen years in corporate credit at leading Indian private banks, and is the author of "What Bankers Whisper" and "Field Notes from the Mountain", part of the Banking Sherpa series on Indian banking practice. He now advises MSMEs, startups and mid-corporates on funding strategy through his firm Funding Sherpa. Learn more at fundingsherpa.in.
