A parliamentary committee is urging wider use of bank-NBFC co-lending and TReDS platforms to address India’s estimated $530 billion MSME credit gap. While these policy measures aim to improve liquidity for small businesses, investors should monitor the asset quality of lenders amid rising credit stress in the MSME segment.
India’s parliamentary finance committee has proposed a fresh strategy to bridge the massive estimated $530 billion (roughly ₹20-25 lakh crore) credit gap facing micro, small, and medium enterprises (MSMEs). The committee is calling for a major push toward co-lending partnerships between banks and non-banking financial companies (NBFCs), alongside wider adoption of the Trade Receivables Discounting System (TReDS) to improve cash flow for small businesses.
The Strategy: Co-Lending and Digital Liquidity
The government has been actively updating the framework for MSME financing, notably through the MSME Development (Amendment) Bill, 2026, which gained parliamentary approval in August 2026. A central part of this strategy is the co-lending model. In this setup, banks provide the lower-cost funds, while NBFCs use their local reach and specialized knowledge to identify and serve small borrowers. Under current RBI directives, both partners must hold at least 10% of the loan risk on their own books. This ensures that both sides are careful about which loans they approve.
Additionally, the committee is advocating for more aggressive use of the TReDS platform. TReDS allows MSMEs to sell their unpaid invoices to financiers to get cash immediately, rather than waiting months for payment. While the government has mandated that Central Public Sector Enterprises (CPSEs) use TReDS, the committee argues that the platform needs to scale by onboarding more private sector buyers to truly fix the working-capital problems of smaller firms.
Investor Perspective: Opportunity vs. Risk
For investors in the banking and NBFC sectors, these initiatives open up new ways to grow loan books. By partnering, banks can reach segments they might otherwise find too risky or difficult to serve directly, while NBFCs can access cheaper capital. However, the sector is not without challenges.
Recent data indicates that the MSME lending environment is becoming more cautious. Loan growth in the sector slowed to approximately 12.7% year-on-year by April 2026, and there have been signs of rising delinquencies, particularly in unsecured and small-ticket loans. Financial institutions are currently balancing the push for growth with the need to maintain strong asset quality. Investors watching this space should track whether the new, simplified co-lending rules help expand credit without significantly increasing bad loans.
What to Monitor Next
The effectiveness of these measures will depend on how quickly private corporate buyers adopt the TReDS platform, as this is essential for clearing the payment bottlenecks that keep MSMEs cash-strapped. Furthermore, with rising stress in some MSME segments, the key monitorable for shareholders will be the performance of MSME-focused portfolios in upcoming quarterly results. Investors should look for management commentary on credit costs and delinquency trends, as these will indicate if lenders are successfully navigating the risk-sharing mandates set by the regulator.