Bank-NBFC co-lending pacts may be expanded to aid MSMEs

New Delhi: A parliamentary standing committee on finance has recommended expanding structured co-lending arrangements between banks and non-banking financial companies to bridge a $530-billion formal credit gap faced by micro and small medium enterprises, or MSMEs, and lower their cost of capital.

Such arrangements would also lower the overall cost of capital for smaller firms that currently heavily rely on NBFCs that lend to them at higher risk-adjusted rates.

The panel also made a case for listing profitable regional rural banks and further strengthening state-run general insurers.


In its report, the committee noted that despite a 21.8% year-on-year growth in bank credit to MSMEs in November 2025, compared to 13% in November 2024, structural deficits persist and NBFC-MSME credit grew at a compound annual rate of 36% from ₹1.41 lakh crore as in March 2021 to ₹4.82 lakh crore in March 2025.

It further recommended the robust expansion of the Trade Receivables Discounting System (TReDS) to resolve acute liquidity constraints caused by delayed receivables, thereby ensuring uninterrupted operational cash flow for the 'missing middle'.

The committee observed that the overall insurance penetration has structurally declined from 4.2% in 2020-21 to 3.70% in 2024-25, indicating that the sector's growth is failing to keep pace with national GDP expansion.

To counter this decline, it recommended that the Department of Financial Services should mandate the development of parametric insurance products for climate-related risks (NatCat) and leverage the 1.63-million business correspondent (BC) network to penetrate Tier 3-6 cities and rural heartland. It also made a case for the revitalisation of public sector general insurance companies and a time-bound roadmap for these companies to achieve organic solvency without "perpetual reliance on accounting adjustments or emergency capital infusions."