The ₹10,000 Crore SME Growth Fund & MSME Credit Assessment Model: Building Risk Capital And Dismantling Collateral Bottlenecks For Micro-Enterprises

Policy Update
Ritobrata Purkayastha

Background

The Micro, Small, and Medium Enterprise (MSME) sector represents the foundational engine of India’s macroeconomic growth, industrial development, and employment landscape. According to the Economic Survey 2025-26, MSMEs contribute approximately 31.1% of India’s Gross Domestic Product (GDP), 35.4% of manufacturing output, and 48.58% of national exports, while supporting the livelihoods of over 32.82 crore people across more than 7.47 crore enterprises.

Despite this significant contribution, formal credit penetration remains a structural challenge. Less than 40% of MSMEs successfully access credit through the formal financial system , with only 16% to 20% of micro and small enterprises receiving bank finance. The rest depend on informal channels. Historically, the primary obstacle has been the “collateral bottleneck”—the traditional banking sector’s insistence on physical assets as security. This asset-backed lending architecture has left an estimated ₹80 lakh crore in credit demand unmet through formal pipelines.

To address this market gap, the Government of India launched the New Credit Assessment Model (CAM) on March 6, 2025. This model transitions underwriting from collateral evaluation to transaction-based, cash-flow lending using digital footprints. Supporting this, the government revised MSME classification thresholds effective April 1, 2025, to create upward mobility for scaling enterprises.

Enterprise Category	Old Investment Limit	Old Turnover Limit	Revised Investment Limit (Effective April 1, 2025)	Revised Turnover Limit (Effective April 1, 2025)
Micro	Up to ₹1 Crore	Up to ₹5 Crore	Up to ₹2.5 Crore	Up to ₹10 Crore
Small	Up to ₹10 Crore	Up to ₹50 Crore	Up to ₹25 Crore	Up to ₹100 Crore
Medium	Up to ₹50 Crore	Up to ₹250 Crore	Up to ₹125 Crore	Up to ₹500 Crore

Building on these reforms, the Union Budget 2026-27 introduced a three-pronged approach—Equity Support, Liquidity Support, and Professional Support—headlined by the newly operationalized ₹10,000 crore SME Growth Fund to provide risk-capital equity.

Functioning

The ₹10,000 crore SME Growth Fund operates on a “Fund of Funds” (FoF) structure managed by the Small Industries Development Bank of India (SIDBI). The government allocates the ₹10,000 crore corpus to a central “Mother Fund” , anchoring SEBI-registered private PE/VC “Daughter Funds”. These Daughter Funds leverage ₹3 to ₹4 of private institutional capital for every ₹1 of government contribution, multiplying the corpus into a ₹40,000+ crore pool.

The Daughter Funds acquire minority equity stakes in growth-stage MSMEs with strong scalability. Since this capital is structured as equity rather than debt, recipient businesses face no immediate EMI or interest repayment obligations. Instead, the fund functions as patient capital, and investors realize returns only during a designated “Liquidity Event,” such as an IPO on the NSE Emerge or BSE SME exchange, or a strategic buyback.

In tandem, the Credit Assessment Model (CAM) automates underwriting using real-time digital integration. Rather than relying on external rating agencies, Public Sector Banks (PSBs) utilize in-house capabilities to assess Existing to Bank (ETB) and New to Bank (NTB) borrowers through a fully automated, straight-through processing (STP) architecture.

The digital evaluation process leverages secure APIs to triangulate multiple data streams : NSDL for PAN authentication , telecom OTPs for contact verification , GSTN for real-time sales transactions , Account Aggregators (AA) for bank statement analysis , ITR for historical profit verification , credit bureaus (CICs) for history checks , and automated Hunter checks for fraud detection.

For micro-businesses operating outside the formal tax net, the platform utilizes the Udyam Assist Platform (UAP), developed by SIDBI under the Ministry of MSME. Operating with banks, NBFCs, and MFIs serving as Designated Agencies (DAs), the platform executes Udyam registration of Informal Micro Enterprises (IMEs). The Udyam Assist Certificate treats informal units on par with formal micro-enterprises for Priority Sector Lending (PSL) purposes. Lenders also utilize tools like the GST Sahay App and Open Credit Enhancement Network (OCEN) protocol to facilitate paperless, collateral-free, invoice-based small-ticket cash-flow credit.

Performance

The systemic deployment of these digital credit frameworks has generated measurable progress. Smt. Nirmala Sitharaman highlighted that under the New Credit Assessment Model, PSBs have sanctioned over 1.97 lakh MSME loans, representing a cumulative credit flow of ₹60,000 crore. According to the Economic Survey 2025-26, between April 1 and November 30, 2025, PSBs processed and sanctioned over ₹3.2 lakh crore under MSME loan applications overall, with over ₹41.5 thousand crore directly sanctioned under CAM credit programmes.

This credit momentum was supported by a policy directive on March 23, 2025, which expanded the MSME credit limit under the digital footprint-based model up to ₹10 crore to broaden capital access. Complementing this, the Account Aggregator framework has scaled rapidly; since its public launch in September 2021 through the end of H1 FY26, it has facilitated the disbursement of ₹2.44 lakh crore across 260 lakh loans, indicating the robust uptake of consent-backed financial sharing.

In parallel, formalization metrics continue to expand. Total registrations on the Udyam Registration Portal (URP) and the Udyam Assist Platform (UAP) reached 7.83 crore enterprises as of February 28, 2026, marking a significant growth from 0.79 crore in FY22, 1.64 crore in FY23, 4.12 crore in FY24, and 6.19 crore in FY25. Within this universe, the Udyam Assist Platform alone has successfully registered over 1.50 crore unique informal micro units. This formalization has been backed by the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), which approved 29.03 lakh guarantees worth ₹3.77 lakh crore between January 1 and November 30, 2025 , alongside raising the guarantee coverage ceiling from ₹5 crore to ₹10 crore effective April 1, 2025.

On the equity front, the matching Mother-Daughter-structured Self-Reliant India (SRI) Fund has assisted 682 high-growth MSMEs with total investments worth ₹15,442 crore as of November 30, 2025. This is supported by an additional ₹2,000 crore top-up in the Union Budget 2026-27 to continue providing risk capital to micro units. Concurrently, SIDBI’s GST Sahay App has recorded the sanction of credit limits aggregating ₹600 crore to more than 1,750+ customers, financing over 15,000+ invoices.

Impact

The core impact of the ₹10,000 crore SME Growth Fund is the injection of patient equity into a debt-dependent sector. Many MSMEs face expansion limits not due to unviable business models, but because critical growth stages are constrained by short-tenure, high-interest debt. Capitalizing these units with equity enhances their net worth and improves their debt-to-equity ratios on balance sheets, allowing them to leverage additional bank credit on favorable terms.

Simultaneously, the transition to cash-flow-based invoice discounting is accelerating “Working Capital Velocity”. Traditional payment cycles of 45 to 90 days strain small businesses. The Union Budget 2026-27 addresses this by making the Trade Receivables Discounting System (TReDS) mandatory for all Central Public Sector Enterprise (CPSE) transaction settlements. Backed by CGTMSE credit guarantees, invoice discounting through integrated GeM-TReDS platforms enables micro-enterprises to convert receivables into liquid cash within 48 hours. This allows small manufacturers to churn their inventory up to three to four times faster, scaling operational revenues without incurring additional debt liabilities.

This liquidity velocity is closely integrated with the rejuvenation of 200 legacy industrial clusters (e.g., Kanpur leather hubs and Moradabad brassware units). Through pay-per-use Common Facility Centers (CFCs), micro-units access advanced equipment like 3D printing and testing labs, bypassing heavy upfront capital expenditure and accelerating adoption of “Zero Defect, Zero Effect” (ZED) certifications. This convergence strengthens their capacity to act as strategic supply chain anchors in high-growth areas like displays and sensors under Semiconductor Mission 2.0.

Emerging Issues

Despite positive policy intent, structural and regulatory bottlenecks persist. First, the regulatory landscape for data-driven underwriting faces friction from privacy mandates. On November 13, 2025, the Ministry of Electronics and Information Technology (MeitY) notified the Digital Personal Data Protection (DPDP) Rules, 2025. With a hard compliance deadline of May 13, 2027, all fiduciaries must implement strict, purpose-specific, and bilingual consent notices or face severe penalties of up to ₹250 crore.

Banks cannot bundle credit assessment consent within broad terms-of-service checkboxes; each digital check (Account Aggregator, GSTN, NSDL) requires separate, explicit, granular opt-ins. Data principals also hold the right to revoke consent easily, requiring banks to immediately erase personal data across all database systems. Underprepared small banks and MSMEs struggle with the technical overhead of managing compliant data lifecycles.

Furthermore, under the DPDP Rules, 2025, Consent Managers—which act as neutral, Board-approved intermediaries between data principals and data fiduciaries—must maintain a minimum net worth of ₹2 crore and register with the Data Protection Board of India starting November 13, 2026. Startups and micro-financers face significant technical friction integrating with this pending compliance layer.

Second, state capacity and fund utilization show execution gaps. Industry data reveals the Ministry of MSME was only able to spend 50% of its budget allocation last year. The Parliamentary Standing Committee on Industry’s 333rd Report (presented on March 11, 2026) highlighted that of eight Budget 2025-26 announcements relevant to MSMEs, only two have been operationalised, exposing clear gaps in administrative execution.

The Committee also flagged that ₹9,000 crore—nearly 36.6% of the Ministry’s BE 2026-27 allocation—remains tied to the operationally closed Guaranteed Emergency Credit Line (GECL), creating a “phantom allocation” that inflates headline figures while masking active developmental outlays. To address structural imbalances, the Committee strongly recommended introducing a separate “Nano enterprise” category with a ₹10 lakh investment threshold to prevent smaller entities from being sidelined by larger micro-enterprises.

Third, equity-based disbursements through profit-driven private Daughter Funds risk selection bias, naturally favoring larger, tech-enabled small enterprises in metropolitan hubs while leaving traditional, family-run rural micro-units underserved.

Way Forward

To optimize the impact of these interventions, policymakers must adopt targeted administrative adjustments:

Decentralize MSME Administration: Ground-level bottlenecks cannot be resolved from New Delhi. Central and state governments must empower municipal CEOs and district collectors, making them accountable for local cluster outcomes , supported by Project Management Units (PMUs).
Scale up “Corporate Mitras”: Partnering with institutes like ICAI, ICSI, and ICMAI, the government should train a pool of certified para-professionals to help micro-enterprises with tax, audit, and DPDP compliance in Tier-2 and Tier-3 towns. Crucially, MSMEs employing an accredited Corporate Mitra must receive a legal “Safe Harbor” from penalties for minor technical compliance errors to facilitate transition into the formal fold.
Implement DPDP-Compliant Infrastructure: Public Sector Banks must adopt Consent Management Platforms (CMPs) that capture granular consent across 22 scheduled Indian languages. Lenders must implement secure software architectures that generate tamper-proof, cryptographically hashed (SHA-256) consent artifacts to serve as reliable evidence during regulatory audits.
Incentivize GST Transition for Informal Units: While the Udyam Assist Platform successfully registers 1.50 crore informal micro-units, these units must be encouraged to transition toward the GST net. Moreover, the rapid scaling of the Open Network for Digital Commerce (ONDC) and the Trade Enablement and Marketing (TEAM) initiative—which aims to onboard 5 lakh MSMEs—presents an essential pathway for digital formalization, lowering transaction costs and improving market integration. Offering structured interest-rate discounts and CGTMSE guarantee concessions to informal units that voluntarily adopt digital, GST-linked invoicing will drive sustainable, formalization-led credit penetration.

Selected References and Important Links

Ministry of Finance, Government of India. (2025). Union Finance Minister and MoS, Finance launch the New Credit Assessment Model for MSMEs. Press Information Bureau. (https://pib.gov.in/PressReleasePage.aspx?PRID=2108812)
Ministry of Micro, Small and Medium Enterprises, Government of India. (2026). Union Budget 2026-27 Places MSMEs at the Centre of Growth. Press Information Bureau. (https://www.pib.gov.in/PressReleasePage.aspx?PRID=2228306)
Small Industries Development Bank of India. (2026). Sumpoorn MSME Conversations: Post-Budget Special Edition. Jocata Sumpoorn Index Update. (https://www.sidbi.in/assets/front/innerpages/SIDBI-Jocata-Sumpoorn-Index-Update_February-2026.pdf)
Ministry of Electronics and Information Technology, Government of India. (2025). Digital Personal Data Protection (DPDP) Rules, 2025. Gazette Notification. (https://www.meity.gov.in)
NITI Aayog. (2025). Enhancing Competitiveness of MSMEs in India. NITI Aayog Publications. https://niti.gov.in
Parliamentary Standing Committee on Industry. (2026). Three Hundred and Thirty-Third Report on Demands for Grants (2026-27). Rajya Sabha Secretariat. https://sansad.in

About the Contributor

Ritobrata Purkayastha is a Research & Editorial Intern at the IMPRI Impact and Policy Research Institute, New Delhi. He is currently pursuing a Bachelor of Science (B.Sc.) in Economics (3rd Year) at XIM University, Bhubaneswar. His research interests encompass monetary econometrics, public policy, and the application of data science and quantitative econometric tools to socio-economic challenges.

Acknowledgements

The author sincerely expresses gratitude to the reviewers Kavin Adithya and Ameya Satnam for their valuable comments, constructive suggestions, and continuous guidance throughout the preparation of this article. Their insightful feedback significantly enhanced the clarity, organisation, and analytical quality of the manuscript. The author also acknowledges the support and encouragement received during the research and writing process, which contributed to the successful completion of this work.