MSME loans are loans to micro, small and medium enterprises that a lender decides from the business's sales, GST returns and bank payments, instead of from audited accounts. They are also called cash-flow loans or business loans for MSMEs. Most of them pay for working capital: raw materials, wages and rent that must be paid before customers pay.
Here is why they are needed. A small business often has no audited accounts and no property to pledge. But it does have a record of what it sells and what it pays. In India, much of that record is now digital.
Consider an auto-parts workshop in Rajkot that asks for a loan of ₹15 lakh. The lender's loan origination system, the software that handles each application from start to approval, collects three kinds of data. First, the workshop's GST returns for the last twelve months. They show sales of ₹1.2 crore. Second, its bank statements, which the owner shares through the account aggregator by giving consent on his phone. Bank statement analysis software reads them and finds that customers pay regularly and no cheques have bounced. Third, the commercial credit bureau report, which shows how the business has repaid earlier loans. From these, the lender approves ₹12 lakh, to be repaid over twelve months. The money is credited to the workshop's current account in two days.
Some lenders do not give the business cash at all. Instead, they buy the raw materials for it, such as steel or plastic granules, and the business repays later. Others let a business pay its suppliers by card or on credit. Some lend to hospitals against the insurance claims that insurers have not yet paid.
Many of these lenders are NBFCs, finance companies that lend but, with a few exceptions, do not take deposits from the public. The page on NBFCs and banks explains the difference. Many banks also buy this software and run it under their own name.
When the business owns a shop, a flat or a factory building, it can borrow a larger amount for longer by pledging it. That is a loan against property (LAP). The lender then also checks who owns the building and how much it is worth.