At MSME Sparks 2026, Misha Sharma of Dvara Research discussed the challenges faced by India's nano enterprises in accessing formal loans and proposed three critical policy changes.
New Delhi, India Jul 13, 2026 ALN: India's micro, small, and medium enterprises (MSMEs) play a crucial role in the country's economic landscape. According to a SIDBI-Crisil report published in May 2025, these enterprises contribute approximately a third of India's Gross Domestic Product (GDP), provide employment to around 26 crore individuals, and account for nearly half of the nationās exports. These statistics underscore the importance of MSMEs in fostering economic growth and providing livelihoods to millions of people.
However, within the broader category of MSMEs lies a significant, yet less visible, segment known as nano enterprises. These businesses are so small that they often do not fit into the existing formal lending frameworks. The lack of a distinct classification for nano enterprises presents challenges in understanding their needs and providing them with adequate financial support.
At the recent MSME Sparks 2026 event, Misha Sharma, the Head of Household Finance at Dvara Research, highlighted the struggles that nano enterprises face in accessing formal credit during a masterclass titled āFinancing the Invisible Enterprise: A Policy Playbook for Nano Businessesā. Sharma discussed the barriers that prevent these small businesses from obtaining loans and outlined potential policy shifts that could help bridge the financing gap.
Currently, there is no official definition for a nano enterprise in India. The classification under the MSME Act begins with micro enterprises, which are defined as businesses with an annual turnover of up to Rs 10 crore. Dvara Research has taken the initiative to define nano enterprises as those with an annual turnover of less than Rs 1 crore. According to estimates from ASUSE 2023-24, there are approximately 7.3 crore nano enterprises in India.
Sharma pointed out that a significant portion of these enterprises, about 88%, are classified as Own Account Enterprises (OAEs). These are typically run by the owner, often relying on unpaid family labor. The remaining 12% are Hired Worker Establishments (HWEs), which employ at least one worker on a regular basis. This distinction is important as it reflects the ambition of the business; enterprises that employ workers are more likely to have growth aspirations beyond mere subsistence.
Within these categories, the size of the businesses is notably small. Dvara Research indicates that 98% of OAEs and 72% of HWEs have an annual turnover of less than Rs 25 lakh. This highlights the micro-scale nature of most nano enterprises and the challenges they face in accessing formal financial services.
Assessing the market size and understanding the demand for formal credit among nano enterprises is a complex task. Due to their scattered and informal nature, it is challenging to arrive at a single, definitive figure. However, Dvara Research estimates that the collective credit requirement for nano enterprises could range between Rs 3.9 lakh crore and Rs 16 lakh crore. This substantial gap in financing presents a significant opportunity for lenders, which cannot be overlooked.
Among this total requirement, Hired Worker Establishments alone are estimated to need between Rs 2.4 lakh crore and Rs 6.7 lakh crore. Sharma emphasized that this segment should be prioritized by lenders, as it has a greater potential for growth. "It is this category that we are referring to, in terms of lacking access to finance," she stated, indicating the need for targeted financial products and services.
When it comes to lending decisions, financial institutions typically evaluate two primary factors: the viability of the business and the availability of information that can serve as collateral. Sharma categorized nano enterprises into three broad groups based on these criteria. The first group comprises businesses that exhibit weak viability and lack any means to prove their creditworthiness. She noted, "While access to finance is a problem for the nano enterprise segment, not all nano enterprises should be accessing formal credit, because there is a segment that simply does not have repayment capacity." This recognition is crucial to avoid misallocation of financial resources.
The second group has reasonable access to formal credit. This includes microfinance borrowers who have transitioned from group loans to individual loans over time. These businesses have demonstrated their ability to manage and repay loans, making them more attractive to lenders.
However, the third group is the focus of policy recommendations. This group consists of businesses that possess the capacity to repay loans but remain locked out of formal credit markets due to a lack of reliable means to verify their creditworthiness. Factors such as inadequate bookkeeping, absence of collateral, and limited digital footprints hinder their access to finance. Sharma stressed, "This is the group where better data and smarter underwriting could unlock loans for businesses that can repay but lack formal proof of creditworthiness." Addressing the needs of this group is essential for fostering economic growth and empowering small businesses.
To facilitate better access to formal credit for nano enterprises, Sharma proposed three key interventions. First, she advocated for an explicit regulatory definition of the nano category, distinct from micro enterprises. Without a clear definition, it becomes challenging to measure and track credit aimed at this segment, leading to a lack of targeted policy interventions. As Sharma noted, "What gets measured gets done," emphasizing the importance of clarity in classification.
Second, she called for product innovation among lenders. This would involve shifting away from traditional, standardized, collateral-linked loans towards cash-flow-based underwriting and flexible risk-sharing models. Such innovations would allow lenders to better assess the creditworthiness of nano enterprises based on their actual business performance rather than rigid criteria. The Reserve Bank of India can play a crucial role in enabling this shift by providing guidance and support for innovative lending practices.
Finally, Sharma argued for selective formalization of nano enterprises. Instead of imposing heavy compliance burdens on all small firms, she recommended practical near-term measures such as Udyam registration and broader adoption of Unified Payments Interface (UPI) systems. Currently, fewer than 5% of nano enterprises utilize any digital financial services, indicating a significant opportunity for enhancing their engagement with formal financial systems.
Blended finance is another strategy that can be employed to attract commercial lenders into the nano enterprise space at scale. This approach combines philanthropic capital with commercial funding through mechanisms like credit guarantees and concessional debt. By leveraging blended finance, stakeholders can create an ecosystem that supports the growth of nano enterprises while also mitigating risks for lenders.
The overarching message from Sharma's session was clear: there is no one-size-fits-all solution for addressing the challenges faced by nano enterprises. Some smaller, household businesses may not require loans or may be content operating within their existing frameworks. The goal is not to push formal credit onto every nano enterprise but to identify and support those businesses that are both willing and able to leverage loans for growth.
The real policy challenge lies in distinguishing between these two groups and designing tailored credit solutions that cater specifically to the needs of businesses that are ready to grow. By focusing on targeted interventions, policymakers can help unlock the potential of India's nano enterprises, ultimately contributing to the broader economic growth and development of the country.
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