Why financial infrastructure for MSMEs is as critical as highways for Viksit Bharat

There’s a saying that a butterfly flapping its wings in Brazil can set off a tornado in Texas. Here in India, it’s not a phrase that comes up in everyday conversations, but the idea behind it feels strangely familiar. Small actions, taken in overlooked corners, can carry consequences far beyond what anyone anticipates. That’s exactly how we should think about the financial infrastructure for India’s small businesses.

Over the past decade, India has undergone significant physical transformation. Highways have stretched across states, airports have come up in once-sleepy towns, and ports have been modernised to meet the demands of global trade. This infrastructure push has opened up markets, shortened delivery cycles, and brought investors to previously ignored districts. It has given the economy a solid foundation to move faster.

But beneath all that steel and asphalt lies another kind of infrastructure, the financial systems that allow businesses, especially the smallest ones, to survive, grow, and adapt.

India’s 63 million MSMEs are not waiting in the wings; they are already centre-stage. They account for close to 30% of GDP, drive nearly half the country’s exports, and employ more people than any other sector outside agriculture. Yet most of them operate without formal credit, and estimates suggest less than 5% are meaningfully insured. These are signs of a deeper fragility. Their access to credit, risk protection, and formalisation mechanisms will decide whether India’s economic journey gathers cyclone-scale momentum or remains a breeze that never leaves the ground.

Bridging the credit gap

The single biggest bottleneck in the growth of Indian MSMEs is access to timely, affordable credit. According to Sidbi and TransUnion CIBIL (2022), the credit gap in India’s MSME sector is estimated at more than ₹20-25 lakh crore. That means crores of businesses are either borrowing informally at high interest or not borrowing at all, effectively stalling their own potential.

But this isn’t due to a lack of funds in the system. Banks, NBFCs, and fintech lenders have liquidity. What’s missing is the infrastructure to confidently lend to smaller, unorganised businesses that lack deep credit histories, audited books, or traditional collateral. In other words, the pipes are leaky, not the reservoir.

One key reform that holds promise is cash-flow-based lending, which moves beyond asset-heavy balance sheets and evaluates businesses on real-time GST filings, invoice flows, and payment behaviours. The introduction of the Account Aggregator (AA) framework and the proposed Public Credit Registry (PCR) can make it easier for lenders to access verified data from multiple sources, securely and with consent.

In parallel, the Open Credit Enablement Network (OCEN) is emerging as a promising infrastructure layer that could standardise and democratise credit distribution by creating APIs between lenders, marketplaces, and digital service providers. While still in pilot and early adoption phases, the model has the potential to let a kirana using a billing app access working capital directly through the platform, without needing to walk into a bank branch.

India has also introduced several enabling initiatives for small businesses in recent years. Udyam registration has streamlined the formal recognition process, improving access to credit and subsidies. The Public Procurement Policy for MSEs mandates that central ministries and CPSEs procure at least 25% of their goods and services from MSEs, giving them a guaranteed market. Most recently, the PM Vishwakarma Yojana has been launched to support traditional artisans and craftspeople with training, credit, and market access. These are important efforts to bring more informal players into the fold.

But these efforts require sustained adoption and interoperability. Regulatory bodies can play a catalytic role by nudging large banks to adopt AA data pipes, incentivising embedded credit models, and reducing friction in loan underwriting. Just as UPI didn’t just digitise payments but reimagined the entire experience, MSME lending needs a similar shift—from form-heavy to frictionless.

The missing risk shield

Credit can power growth, but it is insurance that protects resilience. A business that can’t withstand a hospitalisation, a flood, or a cyberattack is one crisis away from collapse. And yet, estimates suggest less than 5% of MSMEs are meaningfully insured, whether for health, assets, liability, or employee benefits. The informal nature of the sector makes insurance adoption both challenging and urgent.

Along with traditional insurance products, what is needed are bite-sized, embedded, and event-triggered insurance solutions, integrated into the tools MSMEs already use. Think: a fire insurance product embedded into a warehouse rental platform, or a health cover bundled into payroll software.

There’s also a role for regulatory and fiscal nudges. Just as the government co-contributes to NPS or subsidises PMJAY, a targeted co-payment model for micro-insurance products for MSMEs can make coverage more affordable. Similarly, insurers and digital platforms should be encouraged to build bundled, API-enabled products with simplified onboarding.

Notably, insurance needs to be repositioned not as a financial product, but as a business continuity infrastructure. For many MSMEs, one covered claim can be the difference between survival and shutdown.

The way forward

The vision of Viksit Bharat 2047 is not just about achieving a $30 trillion economy, but building one that is inclusive, shock-resistant, and decentralised. That cannot happen without formalising and financing MSMEs at scale. Beyond financial products, India’s broader manufacturing push under initiatives like Production Linked Incentive (PLI) schemes will only succeed if supply chains are robust and distributed. That means creating ecosystems where the expertise of small vendors is not lost in the cracks but is actively integrated by larger enterprises, increasing rural employment, raising productivity, and decongesting urban centres.

The way forward includes: building a unified MSME registry linked to GST, AA, and Udyam data; offering tax breaks for first-time insurance adoption in smaller towns; accelerating adoption of embedded credit models via OCEN and AA frameworks; and actively leveraging public procurement mandates and schemes like PM Vishwakarma to deepen market linkages for micro and traditional enterprises.

India has laid 10,000 km of national highways in recent years. It can certainly build digital rails for millions of small enterprises. The butterfly is already flapping its wings. With the right support, it can set off a chain reaction that carries the Indian economy to its next horizon.

(The author is chairman and group CEO, PB Fintech. Views are personal.)