The MMA Annual Convention 2025 Special Session-3, Growth, Focus, and Resilience with a Special Focus on the MSME Sector, featured industry leaders discussing strategies for sustainable growth. Moderated by Dr. Sandhya Shekar, the panel included Mahesh Balasubramanian, MD of Kotak Mahindra Life Insurance, and A. Balasubramanian, MD & CEO of Aditya Birla Sun Life AMC.
MSMEs can achieve more collectively than individually.
Dr Sandhya Shekar
Advisor, Digital, Business Strategy and innovation
I believe the MSME segment represents the most undervalued asset of our country. It holds immense untapped potential. It’s interesting to note the current excitement surrounding the startup ecosystem. Chronologically, MSMEs are the predecessors of startups. However, they lack the energy, enthusiasm, funding options, and attention that startups enjoy. This disparity is something we need to understand. How can we unlock the potential of MSMEs? If we harness this opportunity correctly, it could lead to significant growth and resilience, pushing our country’s development to a different trajectory. There are many differences between startups, MSMEs, and large companies. Today, I want to address two key points in my opening remarks.
First: Innovation. Startups are known for disruptive innovation. In contrast, MSMEs have focussed more on incremental improvements. However, there’s no reason why MSMEs cannot become synonymous with innovation, the best driver of growth. At the recent Bharat Mobility Show in Delhi, the CEO of a large OEM mentioned that innovation comes from the supply chain, not just the manufacturers. This is true in the manufacturing sector, highlighting the potential within MSMEs. Why isn’t innovation a primary focus for MSMEs? Or is it already happening, just not being publicized enough? These are questions we should explore.
Second: Financial enablers. Innovation requires financial resilience. Financial robustness is crucial for technology investments, infrastructure creation, and skill development. While MSMEs’ size can be an advantage in terms of agility, it can also be a disadvantage regarding their ability to raise funds and take risks. What can they do to overcome this? I want to share a story to illustrate this point.
Have you heard of ant rafts? Ants can form rafts to survive floods. I saw an interesting visual on National Geographic showing thousands of ants creating a raft to survive a severe flood. Despite their tiny size and limited neurons, ants collectively rise above their individual limitations. Can MSMEs leverage the advantages of an ecosystem by working together? By pooling resources, such as funds, infrastructure, and technology, MSMEs can achieve more collectively than individually. The digital age is about leveraging a networked economy. Do we have the structures to support this collaboration? Can we create and reinvigorate these structures to help MSMEs reach their growth targets and realize their potential on a national level?
MSMEs promote inclusive growth
Mahesh Balasubramanian
MD of Kotak Mahindra Life Insurance
First, let’s understand what MSMEs do for India. Globally and in India, MSMEs are cornerstones of growth and critical aspects of the entire value chain of production and consumption. In India, MSMEs contribute about 30% to the country’s GDP, 45% exports, and employ around 23 crore people. While these numbers are impressive, they pale in comparison to other countries. For instance, MSMEs contribute over 60% to Japan’s GDP, close to 53% in Turkey, and more than 60% in Indonesia. The US has about 45% of its GDP coming from the MSME segment. This highlights the headroom available for MSMEs in India to contribute more significantly to our country’s growth.
MSMEs are vital because they promote inclusive growth. By employing large numbers of people, they contribute to economic inclusivity. Unlike big corporations, MSMEs are small and medium-scale industries, with over 6.8 crore units operating across India.
Access: The Primary Issue
So, what challenges do MSMEs face in India? The primary issue is access. This includes access to markets, finance, labour, technology, innovation, R&D, and disaster management. Let me focus on access to finance and disaster management, areas closest to what we in the BFSI segment deal with.
Regarding access to finance, of the total 200 lakh crore credit in the Indian banking system, not more than 15% goes to the MSME segment. The penetration of credit into MSMEs is only about 13-14%. The credit gap in the MSME segment is close to 30 lakh crores, as reported by the RBI. This indicates significant headroom for supporting this segment.
In terms of growth and resilience, numerous initiatives over the last decade have provided impetus to MSMEs. The RBI and the government have implemented various initiatives, such as Udaan registrations, the Pradhan Mantri Vishwakarma Scheme, and the CGTMSE scheme, which have formalized many MSMEs and provided better access to formal credit. Other initiatives like the Trade Receivables Discounting System (TReDS), account aggregators, open databases, GST registrations, and PLI schemes have also supported MSME growth. However, despite these efforts, we are still at about 50% of their needs, with credit penetration at less than 15%.
Insurance: Key Driver of Infrastructure
Let’s examine what the mutual fund and life insurance industries can do. The life insurance industry has an 80 lakh crore AUM, with 60-75% of investments in government securities (G-Secs) and SDL programs, supporting infrastructure spending. Life insurance companies are key players in long-term investments, crucial for infrastructure funding, such as ports, roads, railways, and airports. We buy G-Secs in the 10 year and 30 year category and sometimes even in the 50 year category. These investments have a multiplier effect on the MSME segment by indirectly supporting infrastructure development, employing millions of contractors and labourers.
Now, let’s discuss growth and resilience. Growth capital is vital, but resilience is equally important. Resilience means the strength to endure multiple cycles and build sustainable businesses over time. The insurance industry plays a critical role in providing this resilience, helping MSMEs navigate challenges and remain robust in the long term.
This is where MSMEs require tremendous help. To give you some context, we’re talking about risk transfer. The business of insurance is all about risk transfer. For instance, if you buy insurance for a car worth 10 lakh rupees, by paying a 2% premium to the insurance company, you transfer the risk to them. The insurance company assures you that if something happens to your car, they’ll cover the damages. This concept of risk transfer is essential, yet largely lacking in the MSME segment and other sectors in India. The overall penetration of life insurance and general insurance is just 3.7% of GDP, with general insurance at nearly 1%.
Let’s discuss the impact of this. Climate change and frequent disasters have resulted in significant losses. In 2020, we faced Cyclone Amphan, and two years ago, Cyclone Yaas. Over the last five years, India has suffered 130 billion dollars in disaster-related losses, but only 10% of these are insured. The remaining 90% is borne by the affected individuals or governments. This highlights the critical role insurance can play in transferring risk away from vulnerable people.
Globally, insurance penetration for disasters is around 50%, while in India, it is less than 10%. The mechanism of risk transfer is the focus of insurance, and it can immensely benefit MSMEs and other industries. There are two primary types of risk: risks to the entity (employees, owners, promoters) and risks to the business.
Business Insurance
Business insurance covers in its ambit Fire and Property Insurance which protects physical assets like factory buildings against storms, earthquakes, etc; Marine Insurance which covers goods in transit, addressing supply chain risks; Product Liability Insurance which protects against product failures and associated risks; and Cyber Insurance which covers risks related to cyber threats.
Other insurances include professional indemnity insurance and employee insurance such as Workman’s Compensation, personal accident insurance, health insurance, life insurance, key man insurance, and the Married Women’s Protection Act insurance, which is a fantastic scheme and the proceeds are free from any lien. This protects the women and children of businessmen.
Credit life insurance is another crucial area. During the COVID-19 pandemic, life insurance companies settled over 30,000 crore claims, saving banks from non-performing assets (NPAs). Credit guarantee insurance and surety bonds also provide umbrella protection to customers.
Triple A and Triple B
Despite the availability of these products, MSMEs face challenges due to a lack of 3As: Awareness, Accessibility, and Affordability. To address this, the IRDA has launched the ‘Insurance for All by 2047′ mission as part of the Viksit Bharat initiative. The industry has introduced the ‘Triple B’ approach:
Bima Sugam: A portal to democratise the purchase and servicing of insurance policies, including life and non-life insurers.
Bimavahak: A business correspondent model for the insurance sector, employing women to distribute insurance in villages using mobile interfaces.
Bima Vistaar: A product offering a package of essential insurances for a small premium, including life, health, hospital cash, fire, and personal accident insurance.
The Triple A and Triple B approach aims to enhance risk mitigation in the industry, which is a prerequisite for building resilience. Growth can only follow once preservation is ensured.
Financial engineering is crucial for the survival of SMEs
A Balasubramanian
MD & CEO, Aditya Birla Sun Life AMC
Many people can take pride in creating a success story for SMEs in the country, thanks to the Prime Minister’s vision of making India self-sufficient through initiatives like Make in India. This vision, along with themes like Sabka Saath, Sabka Vikas, Digital India, and Make in India, has set the foundation for the MSME sector. As mentioned, MSMEs contribute about 30% to India’s GDP and provide 45% of the employment.
Having spent 30 years in the Indian mutual fund industry, I recall the vision set in 1992 to establish a separate exchange to help companies raise equity capital, resulting in the OTC Exchange, set up by Mr Ravimohan under the guidance of ICICI and financial institutions. Unfortunately, OTC exchange could not succeed because of lack of vision and other factors.
Low Cost Capital Scenario
SMEs and MSMEs, especially in the finance world, face significant challenges. Financial engineering is crucial for the survival of SMEs. The business model and the segment you operate in must be sustainable. The cost of capital should be affordable to ensure a proper return on investment. We have moved away from guaranteed return schemes to a low-cost capital environment in India.
Historically, MSMEs faced high borrowing costs from banks, often exceeding 18% or 20%, making it challenging to sustain their businesses. Post-COVID, India discovered effective policy-making, similar to the US, by providing government guarantees for borrowers. This significant turnaround post-COVID helped small-scale enterprises grow, provide employment, and build the right skill sets.
The introduction of the credit guarantee scheme made MSMEs more credible. Public sector companies like the State Bank of India and BOB funded MSMEs but with limited resources. The guarantee scheme encouraged private sector banks to fund MSMEs, reducing the cost of capital and improving the understanding of MSME businesses. Today, MSMEs’ credit scores have improved due to government guarantees. The recent budget extended the guarantee schemes for another 10,000 crores for SMEs. This revolution has allowed SMEs to grow, contribute to India’s success story, and account for 46% of exports.
The CEO Yatra
India’s vast geography means SMEs are present across the country. As the CEO of a mutual fund, I undertake CEO Yatra every three years to various markets. My purpose is to understand digital economy evolutions, business success, financial literacy, and UPI payments’ usage by the common man.
I started from Trichy, the place where even the Prime Minister began his first canvassing for his initial run for Prime Minister. Trichy holds a special place for me as well. During my visit there, I met a company with a turnover of about 200 crores, producing motors for renewable energy, particularly windmills. They manufacture these motors in Thanjavur and export them to Baroda, Delhi, and other parts of the country. Trichy, known as Tamil Nadu’s first industrial belt, houses industries that supply equipment both domestically and internationally.
On a similar tour between Pune and Ahmednagar, I discovered traditional companies in the sugar belt facing challenges due to government intervention and pricing restrictions. The policy shift allowing sugar production to be used in ethanol for petrol has made the industry more viable and profitable, benefiting both businesses and the country by saving import dollars.
The power sector has also undergone a revolution, with small-scale enterprises providing solutions for niche industry needs. These companies have significantly benefited from government measures in the past three years.
I also visited a 60-year-old company in Pune that tests bikes for road safety, serving clients like TVS Motors. With a turnover of 60 crores and a profitability of 15 crores, this SME maintains a clean balance sheet. In recent years, cheaper capital has allowed such companies to sustain their return on investment and plan for growth.
Capital Market Evolution
Lastly, let me highlight the Indian market’s evolution. The market cap today is roughly $4.5 trillion, with the Nifty 50 representing large companies. While the Nifty 50 companies used to dominate 65% of the overall market cap, this number has now reduced to 48%, indicating significant growth among smaller companies. The SME exchange, similar to the OTC exchange, has enabled small companies with turnovers of 10-20 crores to raise equity capital and build their business models. Though OTC Exchange did not succeed in a big way, the SME Exchange is doing well.
For example, a company with a 10-crore turnover recently raised 2 crores in equity capital. The stock price went up by multiple times and became a point of criticism. One of the SEBI officials whom I met said that the Government of India is committed to ensuring that even the smallest businesses have access to the Indian capital market through the SME exchange, as long as their business model is genuine.
The Indian market has evolved significantly in the past few years, making money available for companies, primarily through mutual funds, HNIs, and individual investors. The Indian mutual fund industry manages 65 lakh crores, with 6 lakh crores invested in small and mid-cap segments. The increased pool of available capital has contributed to the market’s growth.
To achieve India’s goal of becoming a 10 trillion-dollar economy, the entire ecosystem must grow. Changes in regulations, mindsets, and banking practices have made dealing with MSMEs easier. The next five years will likely see these companies grow larger and fulfill their aspirations, with some potentially becoming larger companies.
Panel Discussion
Dr Sandhya Shekar: Mr. Mahesh, you mentioned that there is a significant gap in terms of the credit available and the credit uptake from MSMEs. If I were to draw a very loose analogy, MSMEs represent a segment that appears to be somewhat risk-averse. They seem to prioritise stability over drastic innovation, focussing more on bottom lines than top lines and valuations, unlike startups. Their propensity for risk seems limited. Do you think the time has come for them to break out of these shackles, or should they, like balancing a portfolio, recognise that debt funds also have an equal place alongside equity funds? Equity funds may offer greater returns, but for the sake of stability, we need people who take a long-term view. How would you strike a balance, and what is your message to MSMEs?
Mahesh Balasubramanian: Entrepreneurship inherently involves taking risks and striving for growth. In a young country like India, with an average age lower than the global average, the aspirations and ambitions of every entrepreneur are to grow. At the same time, they want to manage risks well to avoid exposing their families and businesses to excessive risks.
The key is access to information and opportunities. In today’s digital age, MSMEs have numerous opportunities through networks like ONDC, and platforms like Amazon and Flipkart. These platforms provide MSMEs with chances to increase their business volume. Government credit guarantee schemes offer comfort by allowing borrowing at favourable rates, reducing reliance on high-interest informal sector loans. The formalisation of lending to the MSME sector has been a significant development in recent years.
Small banks and formalised lending have reduced interest rates, and schemes like PLI and CGTSME have provided financial incentives. Bridging the information gap through technology is essential. Support in labour, management, skills, data, technology, and innovation is crucial. Establishing Innovation Hubs across the country will enable MSMEs to experiment and grow. If we create a conducive environment and ecosystem, every entrepreneur will thrive. With the right support and resources, MSMEs can overcome their risk aversion and seize growth opportunities.
Dr Sandhya Shekar: There is obviously no dearth of aspirations. Government policies are in place, and there is a plethora of financial products available to support these entities. Do you think the key inhibitor might be a mindset issue? With your ear to the ground regarding MSMEs, do you see a potential mindset issue holding them back? Are some MSMEs still adhering to old economy thinking? Is this what differentiates the fast-growing MSMEs from those that aren’t growing as quickly?
A Balasubramanian: I observed mixed reactions. For example, one entrepreneur appreciated the GST reform for its simplicity and single tax filing, despite the slight increase in tax. But, another entrepreneur in the power sector considered shutting down their equipment manufacturing for thermal power plants due to ESG factors, despite a post-COVID business boom. They were uncertain about future investments given the potential impact of ESG regulations.
Another challenge is the next generation. Some successors prefer employment or opportunities abroad rather than running the family business. Promoters worry that their children may not share their vision or commitment. However, many still appreciate the banking industry’s support but are hesitant to raise equity capital due to the responsibility of reporting to shareholders quarterly.
I met a listed company in Aurangabad that chose not to manage quarterly results or communicate with investors regularly. Established business models face sustainability challenges as the world changes with automation, technological adaptations, and new business models like EVs. Traditional businesses harbour doubts about their future growth.
Despite these challenges, many companies are committed to skill development. For instance, a company in Trichy proudly recruits transgender individuals to work in their factory, providing employment to those who might otherwise struggle to find work.
Dr Sandhya Shekar: What are the top two inhibitors in your opinion, and the top two facilitators?
A Balasubramanian: One inhibitor is the mindset for technological adaptation. In terms of facilitating growth, creating an ecosystem where the management collaborates to fulfill their vision is crucial. Building a strong team and leveraging talent effectively are also significant facilitators. We need to focus on that.
Mahesh Balasubramanian: The limitations today revolve around access to markets. While many want to grow their business, building a brand and promoting their business takes time and effort. Although there is significant ground presence, access to capital could be improved, as we still aren’t reaching areas where money is most needed.
Regarding enablers, we must create an ecosystem where every SME knows they can access credit or markets quickly. We should reach out to them rather than waiting for them to approach us. Rapid digitization and technology upgrades are also essential. India lags behind in these areas, and improving productivity through technology and digital means is vital for better cost economics, price differentiation, and competitive advantage.
Dr Sandhya Shekar: While the government is doing its best to support MSMEs in financing and ecosystem, do you think the current tax system is user-friendly, particularly with frequent GST changes? What is your view?
Balasubramanian: I think the GST system has evolved nicely, thanks to our finance minister. As a market participant, I observed that discussions about GST changes used to dominate the headlines and debates. However, in the last three years, since the current finance minister took charge, these discussions have become smoother and less controversial, indicating overall satisfaction.
Mahesh Balasubramanian: From a borrower’s perspective, the biggest hindrance to MSME growth is the informal economy. We must formalise this sector. GST registration and other measures help formalize the economy, making it easier for lenders to assess creditworthiness and provide support. Formalization is crucial for MSME growth. Without proper records and transparency, no lender will touch these businesses. Formalization addresses this constraint effectively.
Dr Sandhya Shekar: If agriculture needs to become entrepreneurial in nature, crop insurance from private sectors would be necessary. Could you please share your views and insights on this?”
Mahesh Balasubramanian: The crop insurance, launched by the Prime Minister about five or six years ago, has significantly helped provide insurance to farmers. It’s facilitated through the banking fraternity for those taking crop loans, with crop insurance being insisted upon. The states have been running their own crop insurance schemes, and crop insurance remains a crucial element in the insurance spectrum.
The Agricultural Insurance Corporation of India is dedicated to crop insurance, and all players in the market, including general insurers, have a presence in this segment. Reinsurers like Swiss Re and Munich Reinsurance also support crop insurance. Crop insurance is here to grow and stay, offering vital risk relief to farmers. It will continue to be essential for ensuring farm productivity and farmer resilience, and we can’t expect robust farm produce without comprehensive crop insurance at the individual level.
