MSME Loan Demand Rises 11% While Supply Drops 11% in Q1 2025: SIDBI Report

New Delhi, May 23, 2025 – India’s Micro, Small, and Medium Enterprises (MSME) sector is showing signs of growing financial appetite as loan demand surged by 11% year-on-year in the first quarter of 2025. However,MSME Loan Demand Rise, according to a recent report by the Small Industries Development Bank of India (SIDBI), this increase in demand was met with an 11% decline in loan supply, indicating a growing credit gap in the sector.

The findings, covering the period from January to March 2025, highlight a significant mismatch between the rising financial needs of MSMEs and the cautious lending approach adopted by financial institutions. The report points to potential challenges for the MSME sector, which plays a critical role in India’s economic growth and employment generation.

Key Insights from the SIDBI Report

• Loan Demand Up by 11%: MSMEs across India are actively seeking credit to support expansion, working capital needs, and business revival post-COVID disruptions and global economic pressures.
• Loan Supply Down by 11%: The drop in supply suggests increasing risk aversion among banks and NBFCs, possibly due to rising defaults, regulatory concerns, or liquidity management issues.
• Widening Credit Gap: The simultaneous rise in demand and fall in supply has widened the credit gap, potentially hindering MSME growth and limiting their contribution to India’s GDP.
• Sectoral & Regional Trends: The report notes that service-based MSMEs, especially in Tier II and Tier III cities, showed the highest credit demand, while manufacturing units in traditional hubs faced greater difficulty in securing loans.

Implications for the Indian Economy

The MSME sector accounts for nearly 30% of India’s GDP and over 45% of its exports. A shrinking credit pipeline could impact employment, innovation, and overall economic resilience. Industry experts warn that unless addressed promptly, the credit squeeze could stifle entrepreneurship and stall the momentum of India’s economic recovery.

SIDBI’s Recommendations

To bridge the growing credit gap, SIDBI recommends:

• Enhancing credit guarantee schemes to reduce lender risk
• Promoting digital lending platforms for faster, data-driven loan disbursement
• Strengthening MSME credit scores and financial documentation through digital onboarding and literacy initiatives
• Increasing participation of fintech firms and alternative lenders to improve access

Government & Industry Response

The Union Ministry of MSME is expected to review the findings and assess further interventions to ease credit access. Meanwhile, industry bodies have urged regulators and financial institutions to adopt a more supportive stance and explore innovative lending models.

Conclusion

The Q1 2025 trends highlight an urgent need to realign financial infrastructure with the growing ambitions of Indian MSMEs. As the sector continues to expand its footprint, ensuring timely and adequate credit flow will be crucial for sustaining inclusive economic growth.