Economic Survey Reveals Ongoing Reliance on Informal Credit for India's Small Enterprises

India's small enterprises, a vital pillar of the economy, continue to face significant barriers in accessing formal credit, particularly for small-ticket loans. The latest Economic Survey, tabled in Parliament, highlights this persistent challenge, drawing on data from the Annual Survey of Unincorporated Sector Enterprises (ASUSE) for the year 2023-24. While progress has been made in expanding formal lending for larger borrowings, micro and small businesses remain heavily dependent on informal channels such as friends, family, suppliers, and moneylenders, especially for amounts below ₹50,000.

The survey highlights a clear divide in financing patterns based on loan size. For loans exceeding ₹1 lakh, commercial banks dominate, accounting for 54% of the outstanding credit. This reflects the growing reach of formal institutions in meeting the needs of relatively larger enterprises. However, the picture shifts dramatically for smaller borrowings. In the segment below ₹50,000, friends and relatives emerge as the primary source, accounting for 42% of outstanding credit. Suppliers follow closely at 23%, while formal players, banks, cooperatives, and microfinance institutions collectively contribute only 23%.

This skew toward informal sources persists despite efforts to strengthen formal credit ecosystems, including priority sector lending mandates and the expansion of microfinance networks. The survey attributes the reliance on personal networks to the speed and flexibility they offer. Informal loans often come with low or zero interest, no collateral requirements, and minimal paperwork, making them attractive for urgent or short-term needs. In contrast, formal channels frequently demand documentation, credit histories, and repayment capacity assessments that many microenterprises struggle to meet.

The cost of this dependence is substantial. Informal lending, particularly from moneylenders, carries significantly higher interest rates—often nearing 4% on average—compared with just 2% from cooperatives. Over time, this translates into a heavier financial burden for small firms, limiting their ability to invest in growth, inventory, or working capital. The survey notes that while formal credit access has helped reduce reliance on informal sources for moderate and large loans, the small-ticket segment remains underserved, perpetuating a cycle of high-cost borrowing.

Several structural factors explain these gaps. On the demand side, small entrepreneurs often lack adequate financial literacy, formal documentation, or established credit histories, which deter formal lenders. Thin credit files make risk assessment difficult, leading banks and microfinance institutions to prioritize larger, more verifiable borrowers. On the supply side, formal lenders face profitability challenges in the small-ticket space. High operational costs, including due diligence and monitoring for low-value loans, combined with regulatory constraints, discourage deeper participation.

The survey emphasises that these inefficiencies hinder broader financial inclusion goals. Small enterprises, which employ millions and contribute significantly to GDP, need affordable and reliable credit to scale operations, adopt technology, and weather economic shocks. Over-reliance on informal finance not only raises borrowing costs but also exposes businesses to potential exploitation and unpredictable terms.

Addressing these challenges will require a multi-pronged approach. Strengthening digital credit scoring and alternative data sources could help bridge the information gap and enable faster risk assessment. Expanding the role of cooperatives and self-help groups, which already offer lower-cost options, may provide a viable middle ground. Policy measures to incentivise banks to lend in the micro-segment, through targeted subsidies or relaxed norms, could also encourage greater participation.

Ultimately, the Economic Survey’s findings serve as a reminder that financial inclusion remains incomplete without closing the gap in small-ticket lending. As India aims for sustained economic growth, ensuring that micro and small enterprises can access affordable formal credit will be essential to unlocking their full potential and reducing vulnerability to informal debt traps.