This budget has grabbed headlines for its support to the MSME sector, particularly with the announcement of the 10,000 crore SME Growth Fund. Given the fact that MSMEs have suffered in recent times because of the tariff wars and the dwindling demand in the domestic market, the sector did need support. But is this the nature of support it needed? To answer that, let’s dig a little deeper.
Credit to micro, small and medium enterprises appears to have lost momentum, according to the Trends and Progress in Banking Report. While public sector banks did increase their MSME lending portfolio, private banks slowed theirs to the extent that MSME credit as a share of total adjusted net bank credit fell from 19.3% in March 2024 to 19.0% in March 2025.
The Economic Survey highlights that within the MSME sector, credit extended to micro and small enterprises registered an increase of 24.6% (YoY) in November 2025, up from 10.2% in November 2024. It noted that certain regulatory measures, such as revised guidelines on the âvoluntary pledge of gold and silver jewellery as collateral for small business loans,â have helped improve credit flow to the MSME segment.
However, this trend requires careful scrutiny. Banks may increasingly prefer gold-backed loans because they are easier to secure and carry lower risk for lenders. This means lending decisions may be driven more by the availability of household assets than by the strength or productivity of the business itself. As a result, credit may flow disproportionately to those who can pledge personal assets rather than to enterprises with stronger growth potential. In effect, this supports those who have gold to pledge over those who do not.
Moreover, for micro enterprisesâwhere business and household finances are closely intertwinedâthis trend raises serious concerns about household asset depletion. Entrepreneurs may be compelled to pledge family jewellery to keep their businesses afloat, especially during periods of weak demand or cash-flow stress. In the event of default, the consequences extend beyond business failure to the erosion of intergenerational household assets. This effectively shifts business risk onto poorer households, while banks remain largely insulated through collateral protection. Gold-backed MSME loans blur the distinction between formal bank lending and informal distress finance traditionally associated with pawn-based borrowing. While such loans may improve formal credit statistics on paper, their underlying implications appear more distress-driven.
The Economic Survey also acknowledged that despite several claims around credit support in recent years, MSMEs continue to suffer from credit constraints and weak financial flows. Accordingly, this yearâs Budget appears to signal a clear shift in approach. In earlier Budgets, MSME support was largely routed through credit-guarantee schemes, where the government encouraged banks to lend by absorbing part of the risk, even though MSMEs still had to borrow and repay the loans. In contrast, the âč10,000 crore SME Growth Fund in this Budget marks a different strategy. Instead of expanding debt-based support, the government proposes to back select MSMEs through equity and growth capital, focusing on a limited number of so-called âfuture champions.â
While this approach may help a few enterprises scale up and become globally competitive, it does little to address the widespread working-capital stress and weak demand faced by the vast majority of micro and small enterprises that continue to depend on affordable credit rather than equity investment.
