Authors: Rajpurohit Priya Bhavani Singh, Assistant Professor Ms Manisha Kalra
Abstract: Micro, Small and Medium Enterprises (MSMEs) are widely described as the backbone of the Indian economy, contributing close to 30 per cent of national income, a little over a third of manufacturing output, and roughly 45 per cent of the country's merchandise exports, while sustaining employment for more than 110 million people. Despite this scale, the sector has historically operated under a severe financing constraint, with credible estimates of the gap between demand and formally supplied credit ranging from about ₹20 lakh crore to ₹30 lakh crore in recent years. This paper examines the evolving relationship between bank credit and industrial credit in India, with specific reference to the MSME sector, using secondary data drawn from the Reserve Bank of India (RBI), the Ministry of Micro, Small and Medium Enterprises, Parliamentary disclosures, and other government and industry publications. Employing a Pearson correlation framework on annual data for scheduled commercial bank (SCB) credit to MSMEs and to the industrial sector as a whole, the study finds a very strong, statistically significant positive association between the two series (r ≈ 0.98, p < 0.001), leading to rejection of the null hypothesis of no relationship. The paper further documents that credit to MSMEs grew faster than credit to any other major sector in 2024-25, even as overall bank credit growth dece Fund lerated, reflecting the cumulative effect of policy interventions such as the Credit Guarantee Trust for Micro and Small Enterprises (CGTMSE), the Emergency Credit Line Guarantee Scheme (ECLGS), and priority sector lending norms. At the same time, the study finds that formal credit penetration remains low — by some estimates only about one in seven MSMEs has access to institutional finance — and that collateral requirements, asset-quality caution among lenders, and disparities across enterprise size and gender continue to constrain the sector. The paper concludes with a set of policy-relevant observations on deepening formal credit flow to MSMEs.
