Stories
India's Growth Hampered by Outdated Lending Rules: Focus Shifts to Cash Flow, Not Collateral
- •Indian businesses pay significantly more for capital than developed economies due to a lending model over-reliant on physical assets rather than earning potential.
- •India's MSMEs face a credit shortfall of Rs 20-25 lakh crore (over $200 billion) because traditional lending prioritizes conventional collateral, despite government guarantees.
- •Modern businesses, like those in highway infrastructure with long-term leases and steady cash flows, struggle to secure financing due to the mismatch between value creation and credit assessment.
- •The financial world already values cash flows, as seen with institutional investors in Indian infrastructure, highlighting a contradiction where domestic businesses remain unbankable.
- •India needs to adopt cash-flow-based lending, utilizing frameworks like Account Aggregator and GST records, to assess a business's proven earning capability rather than just its pledges.
Key Questions Answered
In June 2026, India's Parliamentary Standing Committee estimated the credit shortfall for micro, small, and medium enterprises (MSMEs) at Rs 20-25 lakh crore, which represents over $200 billion in unfulfilled credit demand for viable businesses.
The Account Aggregator framework allows borrowers to share verified financial data with lenders with their consent. Combined with GST and banking records reflecting actual sales and collections, it provides lenders with a data-backed picture of how a business earns rather than relying purely on property valuations.
Traditional Indian lending relies too heavily on owned physical collateral like land and buildings rather than verifiable cash flows, contracts, or recurring revenues. This creates a mismatch for modern businesses, such as highway wayside operators, that have steady daily collections and long-term leases yet lack conventional property to pledge.
