SME Financing – How to Bridge the Persistent Demand Supply Gap?

India's micro, small, and medium enterprises (MSMEs) serve as a critical engine of employment and economic growth, yet they face persistent credit gaps, particularly among unincorporated and high-growth micro-enterprises known as Hired Worker Enterprises (HWEs). Existing interventions have saturated the microcredit market without generating proportional employment or income gains, primarily due to the structural mismatch between rigid, fixed-installment loan products and the fluctuating cashflows of small enterprises. This paper critiques the current MSME financing architecture, analyzing the limited employment impact of microfinance loans and the rising delinquency rates. It then proposes an alternative model of cashflow-based credit, wherein repayment obligations dynamically adjust to enterprise revenues, reducing default risk while supporting sustainable growth. Drawing on action research pilots and policy experiments in India, we outline the design of scalable, risk-mitigated cashflow financing instruments, including revenue-linked repayments and micro-equity components, tailored to the realities of small business operations. We estimate that such reforms could unlock ₹15 lakh crore in responsible credit and facilitate 10 crore jobs without imposing fiscal burdens on the government.