42% of Registered MSMEs Have Never Accessed Formal Credit: Report
India’s Micro, Small and Medium Enterprises (MSMEs) are widely regarded as the backbone of the economy, contributing significantly to employment generation, manufacturing output and entrepreneurship. Yet a new report by Piramal Research argues that beneath the headline growth lies a deeper structural challenge: India’s MSME ecosystem is far more geographically concentrated than commonly perceived.
The report, “The Geography of MSMEs: Why India’s Growth Is Concentrated, Not Broad-Based”, authored by Debopam Chaudhuri, highlights how MSME activity, credit flows and policy benefits remain disproportionately concentrated in a handful of states and industrial districts, creating regional imbalances that could constrain India’s long-term growth ambitions.
A Few States Dominate India’s MSME Landscape
The report finds that MSME activity is heavily concentrated in a small number of states. Maharashtra accounts for 15% of India’s MSMEs, followed by Uttar Pradesh at 11% and Tamil Nadu at 9%. Rajasthan (7%), Gujarat (6%), Karnataka (6%), Madhya Pradesh (5%), West Bengal (5%), Andhra Pradesh (4%) and Bihar (4%) complete the top ten states by MSME presence.
Interestingly, the relationship between MSME presence and economic output is uneven. Maharashtra contributes 15% of MSMEs and 14% of GDP, while Tamil Nadu contributes 9% on both counts, indicating a relatively balanced relationship. However, states such as Uttar Pradesh account for 11% of MSMEs but only 9% of GDP, while Bihar hosts 4% of MSMEs but contributes just 3% of GDP. In contrast, Gujarat and Karnataka generate a larger share of GDP relative to their MSME presence, reflecting stronger industrial ecosystems and higher value addition.
The report argues that this divergence points toward significant differences in productivity, enterprise scale and industrial sophistication across states.
The Hidden Concentration Within States
The concentration problem becomes even more pronounced at the district level.
According to Udyam Registration data cited in the report, over 80% of Maharashtra’s MSMEs are concentrated within its top 10 districts. Gujarat records a concentration level of 61.5%, West Bengal 54.7%, Karnataka 50.5% and Rajasthan 48.8%. Even in states with relatively dispersed enterprise activity, a significant share remains clustered within a handful of industrial centres.
In Maharashtra alone, Ahmednagar accounts for 32% of the state’s MSMEs, followed by Pune at 12%, Thane at 8%, Mumbai Suburban at 6% and Mumbai city at 5%.
The report notes that India’s MSME economy is therefore not geographically dispersed but anchored around a limited number of industrial corridors. This creates vulnerabilities ranging from regional inequality and employment imbalances to concentrated credit exposure and economic fragility.
Credit Flows Remain Uneven
Perhaps the most significant finding relates to MSME financing.
Despite being central to India’s economic growth story, MSMEs account for only 4-5% of total bank credit, down from approximately 6% a decade ago. The report estimates the sector’s credit gap at nearly ₹30 lakh crore, citing SIDBI estimates.
Even more concerning is the fact that nearly 42% of registered MSMEs more than 2.6 crore enterprises have never accessed formal credit. The gap becomes substantially larger when unregistered enterprises are considered.
The mismatch between MSME presence and credit allocation is stark. Maharashtra, which accounts for 15% of MSMEs, receives 23% of MSME lending. Uttar Pradesh hosts 11% of MSMEs but receives only 5% of MSME credit. Bihar accounts for 4% of MSMEs while receiving just 2% of loans. At a regional level, western India captures 40% of MSME credit, followed by the South at 26%, North at 22% and East at just 14%.
The report warns that such disparities risk trapping large parts of eastern India in low-productivity cycles where enterprises remain undercapitalised and unable to scale.
Credit Guarantees Are Growing, But Not Equally
Government-backed credit guarantee schemes have undoubtedly expanded MSME financing since the pandemic.
Data from the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) show that loan guarantees in states such as Maharashtra and Uttar Pradesh have grown nearly eleven-fold between FY19 and FY25, while Tamil Nadu has witnessed almost eight-fold growth.
However, the report highlights another concentration challenge. The top ten states account for 66% of MSME credit guaranteed under such schemes in FY25, while the next ten states receive 27% and all remaining states together account for just 7%.
This raise concerns that even well-intentioned policy interventions may inadvertently reinforce existing regional disparities.
A Two-Speed MSME Economy
Beyond geography and credit, the report identifies sectoral composition as another structural fault line.
States such as Uttar Pradesh and Bihar have a large proportion of MSMEs engaged in trading activities 45% and 50%, respectively. In contrast, manufacturing accounts for 31% of MSMEs in Gujarat and 28% in Tamil Nadu.
This distinction matters because trading-led enterprises tend to be smaller, generate lower value addition and possess limited scalability compared with manufacturing-oriented businesses.
As a result, India is increasingly witnessing the emergence of what the report describes as a “two-speed MSME economy” a high-productivity, credit-rich ecosystem concentrated in industrialised states and a fragmented, under-capitalised ecosystem elsewhere.
The Policy Imperative
The report argues that India’s MSME policy framework must move beyond aggregate credit targets and focus instead on the quality and distribution of growth.
Recommendations include geographically differentiated credit strategies, stronger incentives for underserved states, development of new industrial clusters in Tier-2 and Tier-3 cities and redesigning credit guarantee programmes to better support first-time borrowers. It also calls for greater emphasis on shifting enterprises from trading activities toward manufacturing and value-added services through coordinated investments in infrastructure, skilling and incentives.
As India pursues its Viksit Bharat vision and seeks to raise manufacturing’s share of GDP beyond 25% while generating over 100 million jobs, MSMEs will remain central to that ambition. But as the Piramal Research report makes clear, the next phase of MSME development is not simply about increasing credit flow. It is about ensuring that growth is geographically balanced, productivity-driven and capable of creating new centres of industrial excellence across the country.
The real test of MSME policy, the report concludes, will not be how much credit is disbursed, but whether it reduces disparities, enhances productivity and broadens the geography of economic growth.
