India's nano enterprises and the struggle for formal loans

India's roughly 7.34 crore MSMEs contribute close to a third of the country's GDP, employ around 26 crore people, and account for close to half of its exports, according to a SIDBI-Crisil report published in May 2025. 

But blended into that number is a far larger, far less visible sector of nano enterprises, businesses so small that they aren’t considered a distinct category under most formal lending frameworks. 

At MSME Sparks 2026, in a masterclass titled ‘Financing the Invisible Enterprise: A Policy Playbook for Nano Businesses’, Misha Sharma, Head of Household Finance at Dvara Research, laid out why this segment struggles to access formal credit, and what policymakers, lenders, and ecosystem players can do to close the gap.

Nano, not just micro

There's no official definition of a nano enterprise yet; the MSME Act's classification starts at “micro”, with a turnover ceiling of up to Rs 10 crore.

Dvara Research defines nano enterprises as those with an annual turnover below Rs 1 crore. ASUSE 2023-24 data estimates there are roughly 7.3 crore such enterprises in India.

“About 88% of these are Own Account Enterprises (OAEs), run by the owner, typically with unpaid family labour, while the rest are Hired Worker Establishments (HWEs), which employ at least one worker regularly,” Sharma said. 

She noted that this distinction matters because it tracks ambition: “An enterprise with even one hired worker is far more likely to have growth aspirations beyond subsistence (basic survival).” 

Within both groups, most firms are very small: 98% of OAEs and 72% of HWEs have annual turnover below Rs 25 lakh, according to Dvara Research.

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Sizing the opportunity and struggle 

Sizing this market and understanding the formal credit demand isn't easy; nano enterprises are too scattered and informal for a single clean number. But by Dvara Research's estimate, nano enterprises could collectively need anywhere between Rs 3.9 lakh crore and Rs 16 lakh crore in credit, a gap too large for lenders to keep ignoring.

Within that, Hired Worker Establishments alone account for an estimated Rs 2.4-6.7 lakh crore. Sharma pointed out that that's the segment lenders should prioritize, as it shows more growth potential: "It is this category that we are referring to, in terms of lacking access to finance."

For a lender, the decision to extend credit to a nano enterprise comes down to two questions: is the business viable enough to repay, and is there enough information as collateral, a digital trail, formal bookkeeping, to judge that. 

Sharma divided nano enterprises into three broad groups based on these two factors. The first group has neither: weak business viability and no way to prove creditworthiness. "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." 

The second group already has reasonable access to formal credit. For instance, microfinance borrowers who've moved from group loans to individual loans over time. 

It's the third group that policy needs to focus on: businesses that are genuinely capable of repaying a loan, but still get locked out because lenders have no reliable way to verify that, due to a lack of bookkeeping, collateral, digital trail, and formal records. 

“This is the group where better data and smarter underwriting could unlock loans for businesses that can repay but lack formal proof of creditworthiness,” Sharma said.

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Three levers for policy

Sharma proposed three interventions to put nano businesses on the formal credit map. She began by seeking an explicit regulatory definition for the nano category, separate from micro enterprises. Without that clarity, she said, credit aimed at this segment can't even be measured, let alone tracked, and "what gets measured gets done".

Next, she called for product innovation, where lenders shift away from standardized, collateral-linked loans toward cash-flow-based underwriting and flexible risk-sharing models, an area where the Reserve Bank of India can play an enabling role.

Finally, Sharma argued for selective formalization. Rather than pushing all small firms into heavy compliance, she recommended practical near-term levers such as Udyam registration and wider UPI adoption, especially since, by Sharma's account, fewer than 5% of nano enterprises currently use any digital financial service. 

Blended finance, which combines philanthropic capital with commercial funding through instruments like credit guarantees and concessional debt, is another way to bring commercial lenders into this space at scale, not just in pilots.

The message running through the session was simple: there's no single fix for nano enterprises. Some smaller, household businesses genuinely don't want or need a loan, and pushing formal credit onto every nano enterprise isn't the goal. 

The real policy challenge is telling those two groups apart and designing credit solutions only for businesses that want and can use loans to grow, rather than treating all nano firms the same.