Missing-Middle Segment

The missing-middle segment refers to a category of economic agents—primarily small and medium enterprises and lower-middle-income entrepreneurs—who fall between micro-enterprises served by microfinance and large firms served by formal banking and capital markets. In the Indian context, this segment occupies a critical yet underserved position within the banking and financial system, with significant implications for employment, productivity and inclusive economic growth.

Concept and Meaning of the Missing-Middle

The term “missing middle” describes businesses and individuals that are too large to rely solely on informal finance or microcredit, yet too small, risky or insufficiently documented to access conventional bank lending. These entities typically require medium-sized loans for working capital, technology upgrades or expansion, but face structural barriers in obtaining formal finance.
In India, the missing-middle segment is closely associated with micro, small and medium enterprises (MSMEs), informal businesses transitioning towards formality, and self-employed entrepreneurs with scalable operations but limited collateral or credit histories.

Structural Position in the Indian Economy

The missing-middle segment plays a central role in India’s economic structure. MSMEs contribute significantly to gross domestic product, exports and employment generation, particularly in labour-intensive sectors such as manufacturing, trade and services. Despite this importance, credit penetration for this segment remains disproportionately low.
Large firms dominate formal credit allocation due to better financial records and lower perceived risk, while micro-enterprises benefit from targeted financial inclusion initiatives. The missing middle remains squeezed between these two ends, leading to underinvestment and constrained growth potential.

Banking and Financial Constraints

Traditional banking models in India rely heavily on collateral-based lending, standardised risk assessment and documented cash flows. Many missing-middle enterprises operate with informal accounting practices, volatile revenues and limited asset bases, making them unattractive to banks under conventional prudential norms.
Key constraints include:

• Lack of formal credit history and audited financial statements
• Insufficient collateral acceptable to banks
• High transaction and monitoring costs for lenders

These constraints result in credit rationing, forcing enterprises to depend on high-cost informal finance, which reduces profitability and long-term sustainability.

Role of Financial Institutions and Regulation

Addressing the missing-middle challenge involves coordinated efforts across financial institutions and regulators. The Reserve Bank of India has introduced policy measures to improve credit flow to underserved segments, including priority sector lending norms and refinancing mechanisms.
Specialised institutions such as the National Bank for Agriculture and Rural Development and the Small Industries Development Bank of India play a developmental role by refinancing banks, supporting credit guarantees and promoting innovative lending models.

Impact on Employment and Growth

The persistence of a missing-middle segment has direct macroeconomic consequences. MSMEs are among the largest generators of non-agricultural employment in India. Limited access to finance constrains their ability to expand operations, adopt technology and create jobs.
From a growth perspective, under-financed enterprises contribute less to productivity improvements and value addition. This weakens India’s potential to achieve broad-based industrialisation and limits the multiplier effects of entrepreneurial activity across regions.

Financial Inclusion versus Financial Deepening

While India has made substantial progress in basic financial inclusion, the missing-middle problem highlights the distinction between inclusion and deepening. Opening bank accounts and providing basic credit is insufficient if enterprises cannot graduate to higher levels of finance as they grow.
The missing-middle segment represents a failure of financial deepening, where the financial system does not adequately scale with the evolving needs of economic agents. Bridging this gap is essential for transforming subsistence enterprises into competitive, growth-oriented businesses.

Policy Responses and Emerging Solutions

In recent years, policymakers have sought to address the missing-middle gap through structural and technological interventions. Credit guarantee schemes, cash-flow-based lending and digital credit assessment using alternative data have gained prominence.
Fintech platforms, non-banking financial companies and co-lending models between banks and alternative lenders are increasingly targeting this segment. These innovations reduce information asymmetry and transaction costs, making lending to the missing middle more viable.