India’s micro, small and medium enterprises—or MSMEs, to use the technical term—are the unheralded heroes of our economy. With more than 63 million units spread across the nation, they provide close to 30% of the GDP, create nearly 110 million jobs, and contribute heavily to our exports. But beneath this impressive veneer is a problem that many of them quietly struggle with on a daily basis: access to credit.

In reality, for the majority of small business owners, it’s not as easy as just strolling into a bank and applying for a loan. Many lack formal credit histories. Some don’t own assets to use as collateral. Others are too new or too small to be considered seriously by conventional lenders. Consequently, there is a huge credit gap—estimated to be in the range of INR 103 trillion. That’s where Priority Sector Lending, or PSL, enters the scene.

PSL is a policy instrument initiated by the Reserve Bank of India that mandates banks and financial institutions to allocate some of their lending to sectors deemed critical to national development. Agriculture and education are included, but so are MSMEs. What this does is mean that banks are not only encouraged but obligated to lend to small enterprises—opening up opportunities that would otherwise remain shut.

Why is this important? Because PSL assists in formalizing credit for the most needy. It allows first-time borrowers to access capital, establish a credit history, and expand their businesses. It lessens reliance on informal sources of finance, which tend to have exorbitant interest rates. And most significantly, it drives job creation and economic growth from the ground up—particularly in Tier 2, Tier 3, and rural settings where MSMEs tend to operate in the informal economy.

But here’s the truth: just because banks must lend, doesn’t necessarily mean it’s a cakewalk. Most lenders find themselves unable to achieve their MSME PSL targets, not out of a lack of will, but because they still spend a lot on acquiring and evaluating small businesses. MSMEs simply may not have the documentation traditional lenders require. This complicates risk assessment, particularly if data is missing or unstructured.

This is where India’s expanding digital infrastructure is beginning to pay off. With infrastructure such as GST, ITR, UPI, Aadhaar, and bank statement analysis now digitized, financiers can receive more accurate information than ever before. Players that already have close associations with MSMEs—such as e-commerce marketplaces, supply chain aggregators, and fintech apps—can now become the Borrower Agents. These agents assist in co-creating tailored loan products using real-time transaction information, enabling banks to serve MSMEs more effectively while remaining compliant with their PSL requirements.

The idea is, PSL is not simply a compliance box. It’s a system that—if implemented correctly—can release actual, substantial growth. For banks, it’s an opportunity to access a huge, under-served base of customers. For platforms, it’s a means to deepen engagement and provide value-added services. And for millions of MSMEs, it’s the distinction between remaining small and entering the formal economy with confidence.

As India constructs its digital economy brick by brick, PSL may well be the building block upon which our future generation of entrepreneurs emerges.