5 COMMON CREDIT MYTHS MSME OWNERS STILL BELIEVE (AND WHY THEY ARE COSTLY)
- Published on Mar 23, 2026
- Read Time 5 mins
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With 63+ million enterprises in India’s MSME space, they contribute almost 30% of the country's GDP and employ 240+ million people. Despite this scale, credit access remains confusing because of modern loan myths.
A recent 2026 survey by Small Industries Development Bank of India (SIDBI) underlined an improving optimism about working capital availability. The numbers showed that 46% of MSMEs are experiencing this. However, many business owners still misunderstand how credit decisions are made. Even worse, these misconceptions often bring about costly loan mistakes. For example, loan rejections and avoidable higher interest rates or missed subsidy opportunities.
Industry experts point out that MSME owners often rely on hearsay or outdated practices rather than verified financial literacy. As J.P. Panda notes in his lender‑side guide, “Even with a 750 CIBIL score, MSME loans can be rejected if the profile doesn’t align with credit policy.”
Myth 1: Collateral is Always Mandatory
Collateral requirements are shrinking. The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) has stated that loans up to ₹2 crore can be collateral-free. SIDBI and fintech NBFCs now extend unsecured loans for MSMEs trying to use clean energy or get digital upgrades.
Believing collateral is essential discourages small businesses from applying. In reality, collateral‑free loans are expanding, particularly for green MSME projects like rooftop solar or EV fleet financing.
Tip: MSMEs should explore credit guarantee schemes and NBFCs specialising in unsecured green loans.
Myth 2: Subsidies Automatically Reduce Loan Burden
Subsidies are disbursed post‑installation and verification, not upfront. For example, under the PM Surya Ghar scheme, rooftop solar subsidies are credited only after DISCOM inspection.
Moreover, borrowers must service EMIs until subsidies arrive. Unfortunately, MSMEs who believe this myth end up miscalculating cash flow and expecting immediate relief.
Tip: You can structure loans with lenders who deduct subsidies from principal once credited.
Myth 3: One Bank Relationship is Enough
This myth stings as you could keep missing out on chances with NBFCs or fintech lenders who offer faster approvals and tailored green loan products. Most MSMEs only stick to a single bank because of the assumption that loyalty guarantees approvals. But lenders don’t think the same way. They prefer diversifying their risk and capping exposure to one sector.
Multiple green loan applications might signal “credit-hungry” behaviour. But having established relationships with different types of lenders (Banks + NBFCs) lets MSMEs access credit when one lender’s risk policy restricts further exposure.
Let’s look at co-lending dynamics. If a bank and NBFC jointly finance your MSME, the NBFC often retains a minimum of 20% of the loan risk. This means higher approval rates for MSMEs that a single, stricter lender might otherwise reject.
Myth 4: Green Loan Rejection Means You’re Blacklisted
Rejection can never blacklist you. It usually reflects a policy mismatch or incomplete documentation. In many cases, it could also be because of sectoral risk appetite.
You can simply request feedback from lenders and adjust your next applications. Most often, consolidating debts or taking better care of your GST compliance can help avoid rejections.
Also Read: How to Spot and Avoid Loan Scams in This Digital Lending Phase
Myth 5: Green Loans Are Riskier
Many MSMEs believe financing EVs or solar setups is risky as green technologies continue to change. The thought of being left with stranded assets would repel most business owners. But you can read more about its true ROI below.
However, Budget 2026 introduced partial credit guarantees for green MSME loans to reduce lender risk. This means lenders now share risk with government‑backed guarantee funds.
Even better, lenders are viewing green loans as strategic investments. The alignment with India’s decarbonisation targets makes it a win-win for the nation and individual businesses.
Tip: Track MNRE and state portals for subsidy updates.
Also Read: The True ROI of Rooftop Solar
Secure a Green Loan for Your MSME Business
Stay clear of informal credit channels that claim to be “faster and cheaper”. While they generally disburse your loan amount quickly, you should expect exorbitant interest rates at 24-36%. Above this, they may use aggressive recovery tactics to aggravate your loan stress. As an MSME, you can avoid such debt traps and opt for safer alternatives like regulated NBFCs or fintech platforms vetted by the RBI.
Ecofy exists to bring you clarity with green finance processes. Most loans are designed to be collateral-free and tailored for MSMEs or households looking to bring in EVs, rooftop solar, or sustainable upgrades.
FAQs
1. Can MSMEs refinance existing loans if interest rates drop?
Yes. RBI’s 2026 MSME reforms removed prepayment penalties. This allows MSMEs to refinance loans at lower rates without extra charges.
2. Do MSMEs get tax benefits for adopting green loans?
Yes. Under Section 80‑IA, renewable energy investments qualify for deductions, and accelerated depreciation applies to solar assets.
3. What’s the biggest hidden cost MSMEs overlook in credit?
For grid‑connected solar loans, it’s DISCOM service charges. For hybrid loans, it’s battery replacement every 7–8 years.
4. Are fintech lenders safe for MSMEs?
Yes, if they are RBI‑regulated. Borrowers should verify lender registration on the RBI’s official portal to avoid scams.