The MSME (Amendment) Act 2026, passed in August, mandates TReDS usage for public sector units to improve liquidity. While these reforms push for faster, cashflow-based lending, businesses face challenges from geopolitical supply chain disruptions and tighter regulations on NBFC credit products.
The micro, small, and medium enterprise (MSME) sector in India is undergoing a significant policy shift aimed at improving liquidity and reducing the burden of delayed payments. The MSME (Amendment) Act, 2026, which was passed by Parliament in August 2026, introduces stricter mandates for how large buyers interact with small-scale suppliers. A central goal of this legislation is to prevent large firms from using smaller vendors as interest-free financiers by enforcing payment timelines and digital processing.
Mandating TReDS for Public Sector Units
One of the most impactful changes is the mandatory adoption of the Trade Receivables Discounting System (TReDS) for Central Public Sector Enterprises (CPSEs). Under the new rules, CPSEs must process all procurement settlements through this platform. TReDS allows small businesses to sell their invoices to banks or financial institutions immediately, ensuring they receive funds without waiting for the buyer's credit cycle to complete. By shifting toward this digital-first approach, the government aims to unlock working capital that has historically remained trapped in unpaid invoices.
Digital Credit and RBI Vision 2028
Complementing the legislative changes is the Reserve Bank of India’s (RBI) 'Payments Vision 2028.' The regulator is pushing for greater interoperability across TReDS platforms and encouraging an AI-led, data-driven approach to underwriting. Instead of relying heavily on physical collateral, banks are being nudged to evaluate loans based on a company's actual cash flow. This is intended to help 'thin-file' businesses—those with limited credit history—gain better access to formal banking credit.
Regulatory and Geopolitical Headwinds
While the policy shift targets growth, several hurdles remain. There is growing friction regarding the regulatory landscape for Non-Banking Financial Companies (NBFCs). The RBI is currently considering directives to restrict certain revolving credit products that many MSMEs use to manage daily operational liquidity. If these credit avenues are tightened, some small firms may face difficulties in maintaining their working capital.
Furthermore, external macro risks are impacting the sector. The ongoing geopolitical instability in West Asia continues to cause supply chain disruptions, which increase costs and cash flow requirements for exporters. Industry participants have noted that these external pressures, combined with potential trade volatility, could strain the financial health of export-oriented MSMEs. The ability of the banking system to balance these new risk-based underwriting standards with the reality of uneven cash flows for small enterprises will be a key factor to watch in the coming quarters.