How Digital Banking and Global Shifts Are Reshaping MSME Growth in India

By Susanta Dash, Deputy Chief Technology Officer, State Bank of India

India’s Micro, Small, and Medium Enterprises (MSMEs) are not just supporting the economy—they are shaping it. Contributing nearly 30% to the GDP, 45% to exports, and providing livelihoods to over 120 million Indians, this sector has long stood as the backbone of India’s economic engine.

Despite their importance, MSMEs have traditionally struggled to access formal financial systems and compete on a global scale. But this is changing, thanks to a blend of digital banking innovations, NBFC support, banking partnerships, and a strategic shift in response to global market changes such as the U.S. imposing 26% tariffs on Indian exports (BusinessWorld Source).

Let’s take a deeper look at where MSMEs were (AS-IS), how digital banking is transforming them, and what the future looks like (TO-BE).

AS-IS State of MSMEs: The Traditional Struggles

Before digital integration, MSMEs faced critical bottlenecks:

• Limited access to credit due to lack of formal credit history or insufficient collateral.

• Manual operations in areas like bookkeeping, inventory, and compliance, leading to errors and inefficiencies.

• Cash-dominant businesses that lacked transparency and digital footprints.

• Cumbersome banking processes involving long paperwork and repeated physical visits.

• Low adoption of digital tools for payments, taxation, or marketing.

• Difficulty in regulatory compliance due to inadequate digital records.

These constraints slowed growth and limited MSMEs’ ability to scale or export effectively.

Through DB (Digital Banking): The Game-Changer

Digital Banking (DB) is at the heart of the MSME sector’s transformation. Here's how it's bridging the gap:

• Online loan applications with minimal documentation and instant approval features.

• AI/ML-powered credit assessments solutions leverage GST data, utility payments, and cash flows to evaluate the creditworthiness of thin-file borrowers. Incorporating market micro/macro indicators and ancillary data enhances predictive accuracy, enabling early warning signal detection for potential defaults and controlling the NPA Non-Performing Asset (Managing NPAs in the MSME sector can be enhanced through technology and ancillary data by utilizing data analytics, credit scoring, and real-time monitoring to identify potential risks and improve loan recovery efforts. This includes leveraging digital platforms for loan application, disbursement, and repayment tracking). Source: ( https://forms.iimk.ac.in/research/markconf20/Proceedings/287.pdf)

• Digital KYC and onboarding, reducing the time to access formal credit.

• Mobile-first banking platforms that offer 24/7 access to business accounts.

• Integrated digital tools for payments, payroll, tax filings, and accounting—reducing operational overheads.

• Collaborative co-lending models where banks provide capital and NBFCs provide last-mile credit delivery.

Fintech partnerships and platforms like PSBLoansIn59Minutes are making loan disbursals smoother and more inclusive.

TO-BE State of MSMEs: The Digital-First Future

Thanks to digital banking and policy momentum, the MSMEs of tomorrow will be:

• Fully integrated into the formal economy

• Able to access collateral-free credit within minutes

• Running on real-time dashboards for financial tracking

• Compliant by default, with automated GST and tax filing

• Globally connected through digital export platforms and e-commerce integrations

• Digitally empowered, even in rural and semi-urban markets

This is more than just a tech upgrade—it's a complete structural evolution. It means an MSME in a Tier 3 town will have the same tools, access, and visibility as one in a metro city.

NBFCs, Banks amp; Co-Lending: A Collaborative Ecosystem for MSMEs

Alongside digital banking, NBFCs (Non-Banking Financial Companies) are instrumental in closing India’s massive MSME credit gap—estimated at ₹28.24 lakh crore. Unlike traditional banks, NBFCs offer:

• Customized, flexible lending solutions

• Stronger presence in underserved regions

• Tech-driven processes like digital underwriting and remote verification

When these NBFCs partner with banks under co-lending arrangements, it creates a win-win:

• Banks offer capital at scale

• NBFCs deliver speed, flexibility, and last-mile access

This partnership model is reshaping MSME lending with wider reach, lower interest rates, and faster credit deployment.

(Source: https://www.financialexpress.com/business/banking-finance-nbfcs-and-msme-lending-in-india-a-key-partnership-for-economic-growth-3699084/)

Global Headwinds: The Impact of U.S. Tariffs on MSMEs

Recent 26% tariffs by the U.S. on certain Indian goods have triggered anxiety among Indian exporters. For MSMEs, the impact is sharp:

• Increased costs, reducing competitiveness

• Uncertainty in export orders and revenue streams

• Cash flow disruptions, affecting local operations and employment

But the sector is fighting back with strategic diversification. Many MSMEs are now:

• Exploring new markets in the Middle East, Africa, and Southeast Asia

• Digitizing their exports via e-commerce, cross-border logistics, and online marketplaces

• Investing in product innovation to compete globally despite trade barriers

These shifts are essential for long-term resilience and underline the need for financial flexibility and global readiness.

In Numbers: MSME Growth Snapshot

• ₹2.3 lakh crore in loans disbursed through digital platforms in 2023

• Over 11 million jobs created by MSMEs in FY 2023-24

• UPI crossing 1.5 billion daily transactions—transforming digital payments

• MSME exports rising from ₹3.95 lakh crore (2020-21) to ₹12.39 lakh crore (2024-25)

These numbers don’t just show growth—they reflect how MSMEs are evolving in real-time.

Conclusion: MSMEs, Digital Banking, and the Road to Resilience

Digital banking is not just enhancing how MSMEs manage money—it is redefining how they do business. It is bridging historical financial gaps, encouraging formalization, and enabling even the smallest entrepreneur to dream big.

At the same time, global changes like the U.S. tariffs are reminding us that MSMEs must continue to diversify, digitise, and adapt.

At State Bank of India, we remain deeply committed to empowering MSMEs by offering secure, efficient, and inclusive digital banking solutions. Together, with the support of NBFCs, banks, and fintech ecosystems, we can help every Indian MSME tap into its full potential.

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