Micro and trading micro, small and medium enterprises need more focused policy support, according to Equitas Small Finance Bank Managing Director and Chief Executive Officer, who said the segment continues to face disproportionate stress from elevated financing costs and thin operating margins. Speaking on the broader state of the small-business economy, he argued that while MSMEs as a whole remain central to India's growth story, the smallest and most trade-dependent firms often lack the balance-sheet strength to absorb higher interest burdens.
Credit Pressure Builds
The executive's remarks come at a time when small businesses are navigating a difficult mix of uneven demand, working-capital strain and still-firm borrowing costs. For micro enterprises, especially those engaged in trading activity, credit is often used not for expansion but to finance inventory, supplier payments and day-to-day operations. That makes interest expense a direct determinant of survival rather than a secondary cost.
He said the government could support micro and trading MSMEs by exploring options to subsidise interest on loans, a move that would effectively lower the cost of credit without requiring a broad-based intervention across the entire lending system. Such a measure, he suggested, would be more efficient if directed at the most vulnerable borrowers rather than applied indiscriminately.
The comments reflect a recurring policy debate in India: whether the MSME sector needs general credit expansion or more finely calibrated relief. Large and medium enterprises often have access to formal banking, collateral and diversified revenue streams. Micro and trading firms, by contrast, are more exposed to volatility in sales, delayed receivables and seasonal demand. In that environment, even a modest increase in borrowing cost can compress margins sharply.
Why Targeting Matters
A targeted interest subsidy could help preserve liquidity for firms that are otherwise creditworthy but temporarily stressed, particularly in trading segments where inventory cycles are short and cash conversion is fast but fragile. The logic is not to replace market-based lending, but to make formal credit more usable for businesses that might otherwise rely on informal borrowing at much higher rates.
The proposal also aligns with the broader policy challenge of improving credit transmission to the smallest firms. India has made repeated efforts over the years to strengthen MSME finance through guarantee schemes, formalisation drives and digital lending channels. Yet access remains uneven, especially for enterprises with limited documentation, low collateral and irregular income patterns. In that context, a subsidy on interest could act as a bridge between policy intent and practical access.
For lenders, however, any subsidy framework would need to be carefully designed. Banks and non-bank lenders typically assess MSME risk through cash flows, repayment history and sectoral exposure. If support is too broad, it can dilute incentives for prudent lending. If it is too narrow, it may exclude precisely those firms most in need. The challenge for policymakers would be to define eligibility in a way that captures genuine micro and trading distress without encouraging misuse.
Policy Trade-Offs Ahead
The remarks also underscore a larger macroeconomic issue: small enterprises are often the first to feel the effects of tighter financial conditions and the last to benefit from an upswing. Because they are deeply embedded in local supply chains, their stress can quickly spread to employment, consumption and informal commerce. That makes MSME support not just a sectoral issue, but a broader growth and jobs question.
Equitas Small Finance Bank's intervention is notable because small finance banks are often closely exposed to retail borrowers, micro entrepreneurs and underserved segments. Their perspective tends to reflect ground-level credit conditions more directly than that of larger universal banks. The call for targeted relief therefore adds weight to concerns that the smallest firms may need more than generic policy optimism to recover fully.
For now, the message from the bank chief is clear: if the government wants to strengthen the MSME backbone of the economy, it may need to move beyond broad credit rhetoric and consider measures that directly reduce the cost of borrowing for micro and trading businesses. In a sector where survival often depends on cash flow discipline and affordable working capital, even limited interest support could have an outsized effect on resilience and job preservation.