The MSME sector is the backbone of India’s economy. According to the Economic Survey 2025-26, MSMEs account for 31.1 per cent of GDP, 35.4 per cent of manufacturing output and 48.58 per cent of exports. As of August 2026, 9.16 crore MSMEs are registered on the Udyam platform, employing more than 40 crore people. This is second only to the agriculture sector in terms of employment. At this pace, it could soon overtake agriculture in terms of employment, marking a significant shift in the structure of the Indian economy.
Aiding credit access
Challenges faced by MSMEs stand out repeatedly: access to institutional credit, working capital management and the growing burden of regulatory and compliance requirements. Interestingly, two of these three challenges are directly related to finance and interlinked. In our banking system, MSMEs generally face higher perceived credit risk and consequently higher borrowing costs. This translates to demanding collateral that a small business simply does not have. The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) scheme was introduced precisely to break this deadlock. But despite strong growth in CGTMSE-backed loans and similar schemes like Mudra, a vast majority of MSMEs still rely on informal credit. When margins are thin, even a 0.5 per cent difference in interest rate has a huge impact on the borrower.
The recently passed amendment bill carries seven key reforms. Some address long-standing operational difficulties, particularly around delayed payments and registration, while others simplify the regulatory framework and create room for businesses to grow.
Classification and registration
The central government can now set and revise MSME classification limits, based on investment in plant and machinery or equipment and on turnover, through a simple notification. Previously, these thresholds were fixed in the act itself. Now they can change according to prevailing economic conditions. Further, the bill makes filing of memorandum through a national digital platform free and voluntary for all MSMEs. In practical terms, this is expected to operate through the existing Udyam registration ecosystem.
Payments through TReDS
The bill makes it mandatory for all Central Public Sector Enterprises (CPSEs) to settle invoices for goods and services procured from MSMEs through the Trade Receivables Discounting System (TReDS). State governments can extend the same mandate to their own public enterprises and state entities. This matters because delayed payments have a ripple effect on MSMEs. Routing payments through TReDS can significantly improve the speed and predictability of payments.
Mediation and Arbitration
A time-bound mechanism is introduced for disputes reaching a facilitation council or mediation service provider. The formula is 90-30-90. Mediation must conclude within ninety days of the first appearance. If it fails, arbitration must begin within thirty days. Finally, the arbitral award must be given within ninety days from the completion of pleadings. The process can also be conducted online through video conferencing and electronic filing, helping save both time and cost.
Recovery of Dues
Once a mediated settlement or arbitral award is made, state authorities can recover the amount as arrears of land revenue through the appropriate government machinery. The settlement or award is treated as a valid and legally enforceable debt. For MSMEs, this strengthens the enforceability of the claim and provides an additional route for recovery, including recognition under the Insolvency and Bankruptcy Code, 2016.
Legal Recourse
Even after an award is made, a buyer can still contest it in court. Under existing rules, a buyer challenging an arbitral award must first deposit 75 per cent of the awarded amount. The amendment also allows the court to direct a reasonable portion of the deposited amount to be paid to the MSME supplier. Further, if the case remains pending for more than six months, the court must direct payment of at least 50 per cent of the awarded amount to the MSME supplier. This safeguards the interests of the MSME against undue delays in legal proceedings.
Revised framework
The bill encourages state governments to set up multiple MSME facilitation councils. State governments are also required to provide the necessary infrastructure, including physical and digital systems, adequate resources and trained manpower. This is a step in the right direction because payment disputes can be resolved much faster across multiple centres rather than just one or two.
Decriminalisation of offences
Several offences that once invited conviction and fines will now be dealt with a lenient hand. Procedural lapses such as non-filing of registration or non-supply of information will no longer attract criminal conviction. Likewise, furnishing incorrect information and non-disclosure of unpaid dues by buyers will initially attract a warning, followed by monetary penalties for subsequent instances. The bill replaces a criminal threat with a compliance nudge.
Taken together, the seven reforms point to three broader objectives. The first is to ease the conduct of business by simplifying registration and strengthening mechanisms for faster payments and dispute resolution. The second is to provide greater impetus for growth by improving the working-capital position and strengthening the enforceability of MSME claims. The third is to simplify regulation and compliance by moving towards digital processes and replacing certain criminal provisions with a more proportionate system of warnings and monetary penalties. The real test, however, will not be the legislation itself, but its implementation. A meaningful difference can be felt only when they translate into outcomes on the ground.
