Opinion | Empowering The Backbone: How S2S Financing Is Revolutionising India’s MSME Landscape

Last Updated:May 30, 2025, 12:19 IST

With over 6.38 crore MSMEs employing 110 million people and contributing 30 per cent to GDP, India’s economic future depends on enabling inclusive, tech-driven access to finance

India’s micro, small, and medium enterprises (MSME) sector is a dynamic force driving the nation’s economic engine.

India’s micro, small, and medium enterprises (MSME) sector is a dynamic force driving the nation’s economic engine. As of May 2025, over 6.38 crore MSMEs have registered under the Udyam framework, 3.69 crore via the Udyam Registration Portal, and an additional 2.69 crore through the Udyam Assist Platform (UAP). This sector employs more than 110 million people and contributes nearly 30 per cent to India’s GDP. Yet, despite its sheer scale and significance, the sector remains constrained by a persistent, systemic challenge: access to timely and adequate financing.

The numbers paint a sobering picture. Nearly 99 per cent of all MSMEs are micro-enterprises, often family-run ventures operating on razor-thin margins. These businesses struggle to secure loans from traditional financial institutions, which demand collateral, credit histories, and extensive compliance requirements that micro-entrepreneurs often find difficult to meet. This mismatch between financial need and institutional comfort has led to an alarming credit gap estimated at Rs 25 lakh crore.

While large banks and NBFCs have typically avoided small-ticket, short-term loans due to high underwriting costs, a transformative new model has emerged to change the game. Enter small-to-small (S2S) financing, an innovative solution facilitated by M1xchange, an RBI-licensed Trade Receivables Discounting System (TReDS) platform. This approach is revolutionising working capital access by connecting MSMEs directly with financiers, sidestepping traditional gatekeepers and offering a lifeline to enterprises in Tier 2 and Tier 3 cities.

What makes S2S unique is its inclusivity and adaptability. Unlike conventional supply chain finance, which benefits only a few select vendors tied to large anchor buyers, S2S opens up invoice financing to all tiers of MSMEs – micro, small, and medium. It enables early cash flows without requiring collateral, credit history, or complex documentation. Financing is off-balance sheet, unsecured, and affordable, thereby democratising access to liquidity for the businesses that need it the most.

This deep-tier financing solution is especially crucial in manufacturing-heavy sectors like automotive, engineering, textiles, and metals industries, where a disruption in vendor cash flows can derail entire production lines. Manufacturers leveraging S2S platforms can now ensure that their smaller suppliers receive timely payments, enhancing supply chain stability and growth. In effect, the financial empowerment of small vendors becomes a strategic imperative for the entire ecosystem.

But the real technological magic behind the scenes lies in the rise of Credit Analytics Engines (CAEs). These advanced platforms leverage machine learning, big data, and behavioural analytics to assess the creditworthiness of MSMEs. By analysing data from GSTN filings, bank statements, TReDS transactions, and payment behaviours, CAEs provide a far more accurate and nuanced picture of a business’s financial health than legacy credit rating systems ever could.

This alternative credit evaluation model allows MSMEs without prior borrowing history to access formal credit for the first time. Importantly, the S2S model doesn’t just provide liquidity, it helps build a financial identity for micro-entrepreneurs, integrating them into the formal economy. For many, this is a crucial first step towards sustained business growth, financial inclusion, and resilience.

The impact is already being felt. With growing confidence in CAE-powered assessments, more banks, NBFCs, and fintech lenders are coming on board the S2S platform. This expanded participation has significantly improved MSME access to competitive financing. The digital footprints created through these transactions lay the foundation for long-term financial partnerships, elevating both borrower and lender confidence.

S2S financing represents more than just a new financial product. It reflects a philosophy of inclusivity and innovation. It is a vivid example of how private sector ingenuity and public policy vision can intersect to solve deep-rooted systemic problems. In many ways, it aligns perfectly with India’s digital public infrastructure narrative, echoing the success of platforms like Aadhaar, UPI, and ONDC in enabling inclusion at scale.

However, unlocking the full potential of S2S requires continued policy support and scalable digital infrastructure. Regulatory bodies must encourage broader acceptance of alternative credit scoring, reduce compliance friction for small businesses, and incentivise financiers to lend to micro-entrepreneurs. Simultaneously, increased awareness and digital literacy campaigns must be launched to help MSMEs understand and embrace these new-age solutions.

India’s aspiration to become a $5 trillion economy cannot be achieved by focusing solely on large enterprises and unicorns. The true levers of growth lie with its 6.38 crore-strong MSME community. When these businesses thrive, they create jobs, foster innovation, and drive exports, all while promoting regional economic development and social equity.

In that sense, the MSME sector is not just the backbone of the Indian economy, it is the soul of its entrepreneurial spirit. By scaling innovative models like S2S financing, India has the opportunity to transform the fortunes of millions of small businesses and, in doing so, reshape its economic destiny from the ground up.

The road ahead is clear. It’s time to reimagine MSME finance not as a high-risk endeavour, but as an opportunity to unlock grassroots growth. With the right technology, policy, and intent, we can ensure that no enterprise is too small to dream big.

The writer is a technocrat, political analyst, and author. He pens national, geopolitical, and social issues. His social media handle is @prosenjitnth. Views expressed in the above piece are personal and solely those of the author. They do not necessarily reflect News18’s views.

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