As India's MSME sector matures, IDBI Bank's Sumit Phakka says the lending framework must keep pace

India's micro, small, and medium enterprises are no longer merely the economy's support structure; they are increasingly its growth engine. Contributing 30.1% to India’s gross domestic product (GDP), accounting for 35.4% of manufacturing output and nearly 45.73% of the country’s total exports1, the sector has earned its place at the very centre of India's Viksit Bharat ambition. As of November 2025, over 7.16 crore MSMEs with an employment base of 31.33 crore are registered on the Udyam Registration Portal and the Udyam Assist Platform2, a number that speaks not only to the sector’s vast scale but to the accelerating momentum of formalisation that is reshaping how India’s smallest enterprises are seen, served, and financed.

The Union Budget 2026 marked a decisive step forward in this direction, introducing a Rs 10,000 crore MSME Growth Fund, expanding credit guarantee covers, tightening the enforcement of the 45-day payment mandate, and reinforcing the government’s push for MSME-led manufacturing. Taken together, these measures represent what many in the financial sector are beginning to recognise as a structural reset in how India’s MSMEs are financed and supported.

In an interview with The Economic Times, Sumit Phakka, Deputy Managing Director of IDBI Bank and a banker with nearly three decades of experience, sees this as precisely that moment of reckoning. “This union budget has basically focused on MSMEs in two ways,” he says. “One is that it has tried to build on the already existing digital infrastructure, be it the GST returns or be it the digital footprints of the MSMEs. And second is it has increased the guarantee cover that is available for MSME lending to the banks. These are the two initiatives which I think would go a long way in making sure that Prime Minister Modi's vision of a Viksit Bharat by 2047 and Make in India are truly implemented on the ground, Phakka explains.

For decades, MSME lending in India has been rooted in the language of collateral, with access to formal credit determined largely by the assets a borrower could pledge rather than the business they were building. According to SIDBI’s Annual Report 2024, credit outstanding to the MSME sector grew by 14.8% in FY2025 to reach Rs 31.3 lakh crore, with 90-day delinquencies declining to a five-year low of 1.79%3, reflecting a sector in considerably better health than its historical reputation might suggest. Yet the underlying challenge of credit access, particularly for smaller and first-time borrowers, persists.

IDBI Bank’s approach to bridging this gap is anchored in rebuilding the underwriting framework from the ground up, with cash flow visibility at its centre. “We are focusing more and more on tracking the cash flow data, using that data to understand the requirements of the MSME borrower, making sure that we are able to offer them the facilities as per their requirements, not only based on the collateral securities,” Phakka elucidates. This signals a fundamental shift in how the bank reads creditworthiness, moving from static asset assessments to dynamic, behaviour-based lending.

The 45-day payment mandate, while still unevenly implemented across the ecosystem, is beginning to act as a catalyst for this transition. Phakka observes that progress on the ground is real, though not uniformly distributed: “While the MSMEs which are dealing with maybe the government departments and large corporates and PSUs, we are seeing much better payment discipline that is coming in. But for the other MSMEs or the ones that are dealing with slightly more, less established players, the discipline still has to come in,” he notes. The challenge remains most acute at the micro and nano end of the spectrum, where cash flow pressures are sharpest, and the formalisation journey is still a work in progress.

It is here that the role of digital infrastructure becomes particularly significant. India's rapidly expanding digital public infrastructure, including GST return trails, digital payment records, and the Udyam registration ecosystem, is giving lenders a new lens through which to assess and serve borrowers who would previously have fallen entirely outside the formal credit net. IDBI Bank has moved decisively to leverage this. The bank's I-MSME Express platform delivers end-to-end digital underwriting for loans up to Rs 25 lakh, with a sanction or rejection turnaround of no more than 30 minutes. A complementary initiative, I-Prompt, ensures that small-value accounts of up to Rs 10 lakh are renewed on time, addressing what may appear to be an administrative detail but is, in practice, a lifeline for enterprises whose entire operating rhythm depends on working capital continuity. “This year alone, we have supported more than 8,000 to 10,000 entities with an exposure of about Rs 5,000 crore,” Phakka notes, with the bank’s average MSME ticket size of approximately Rs 25 lakh underscoring exactly where on the size spectrum its attention is directed.

The bank has also built out a wider ecosystem of enablement, encompassing co-lending arrangements with fintech partners, invoice bill discounting, supply chain financing, and dedicated credit support centres across major urban centres staffed by MSME-specialist relationship officers. The co-lending model, in particular, has seen considerable traction. The bank's co-lending book grew nearly fourfold in the current year, from approximately Rs 250 crore in March 2025 to close to Rs 900 crore. The operating philosophy behind it is clear and deliberate. “Discipline comes from my side. Agility and speed come from the fintech side,” Phakka says.

On the sectoral opportunity ahead, Phakka sees the convergence of manufacturing, exports, and clean technology as IDBI Bank's natural terrain. Particularly notable is the growing role of MSMEs in defence manufacturing, a domain that until recently was largely the preserve of large public sector undertakings. India's defence industrial base today includes over 10,000 MSMEs engaged in potential collaboration across the value chain4, and defence production in FY2024-25 reached an all-time high of approximately Rs 1.51 lakh crore, an 18% jump over the previous year5. Auto components represent a similarly compelling frontier, with India's automotive supply chain increasingly drawing in smaller manufacturers as it scales to meet both domestic demand and export ambitions. SIDBI's annual report identifies defence, auto components and clean tech as among the key sector-specific drivers of MSME growth in achieving the vision of Viksit Bharat by 20476. “We firmly believe that with the initiatives that have been announced in the budgets and in the previous budgets also, more and more MSMEs are getting into newer areas, areas like defence manufacturing or auto component manufacturing, areas which have traditionally not been MSME areas,” Phakka observes.

Regulatory alignment of MSME definitions has added yet another dimension to this evolving landscape. As enterprises mature and migrate upward across classification categories, from small to medium or from medium to mid-sized corporate, banks must manage that transition with care and continuity. Phakka views such migrations not as a compliance burden but as an affirmation. “Borrower migration or entity migration is an indicator of the fact that the MSME ecosystem is maturing. And this maturity of the MSME ecosystem is basically taking us to the vision that the Prime Minister has of Make in India, Make for the World, and Local to Global,” Phakka notes.

What IDBI Bank is building, Phakka emphasises, is not a suite of standalone products but a full-lifecycle banking relationship with the MSME borrower: from early survival credit through growth finance, working capital, payroll banking, and, as enterprises internationalise, forex services. Cluster-based financing, designed around the specific needs of select industrial clusters rather than applied as a generic overlay, completes the picture. MSME credit growth by scheduled commercial banks in FY2025 outpaced overall gross advances growth of 11%, positioning the sector as a preferred destination for institutional lenders7. The question ahead is whether that institutional momentum can be channelled with enough precision and empathy to reach the enterprises that have historically been left out. For IDBI Bank, that is not a peripheral ambition; it is the core of the strategy.

References:

1. Press Information Bureau, Government of India. (2025, July 3). MSME sector accounts for 30.1% of India's GDP, 35.4% of manufacturing and 45.73% of exports in the country: Union Minister for MSME. Ministry of Information and Broadcasting. https://www.pib.gov.in/PressReleasePage.aspx?PRID=2142170®=3&lang=2
2. India Brand Equity Foundation. (2025, November). MSME industry in India. IBEF. https://www.ibef.org/industry/msme-presentation
3. Small Industries Development Bank of India. (2025). MSME outlook: Annual report 2024-25. SIDBI. https://www.sidbi.in/annualreport/AnnualReport202425/msme-outlook.php
4. Invest India. (2025). Investment opportunities in defence manufacturing. Invest India. https://www.investindia.gov.in/sector/defence-manufacturing
5. Press Information Bureau, Government of India. (2025). Defence production reaches all-time high. Ministry of Information and Broadcasting. https://www.pib.gov.in/PressReleasePage.aspx?PRID=2154551®=3&lang=2
6. Small Industries Development Bank of India. (2025). MSME outlook: Annual report 2024-25. SIDBI. https://www.sidbi.in/annualreport/AnnualReport202425/msme-outlook.php
7. TransUnion CIBIL. (2025). India's MSME commercial credit portfolio grew 13% YoY. TransUnion CIBIL Newsroom. https://newsroom.transunioncibil.com/indias-msme-commercial-credit-portfolio-grew-13-yoy/