To countless Indian micro, small, and medium enterprises (MSMEs), secured lending is a burden which often hides the price a borrower pays for lacking credit history. Securing credit for such MSMEs is painfully fraught with exchanging collateral for a loan—gold, loans against securities, property, and basically anything that assures the lender of repayment.
And those with feeble credit history are often sidelined and often find recourse with unsecured loans at higher than usual interest rates. In most cases, since the lender assumes a more manageable credit exposure, the asymmetry, despite being uncomfortable, is how credit has been extended.
Building a credit history
The mechanics of building credit are straightforward: only secured loans build credit history—quite an irony that an MSME wanting a loan needs credit data that could be built only if he or she had a loan.
Every equated monthly instalment (EMI) paid on time is reported to credit bureaus like CRIF High Mark, CIBIL, and Experian. Over 12 to 24 months of consistent repayments, a borrower who started with no formal credit record begins to accumulate a score. That score unlocks future loans.
It changes the terms on which those loans are offered. Interest rates come down, tenures extend, and lenders who once required collateral begin to offer unsecured options. For an MSME or an individual who started with a loan against property or a gold loan, this progression can represent a significant shift in financial standing.
Collateral changes lending calculus
The credit score is important, but its importance is often abstracted from the practical dynamics that shape it. In India’s lending ecosystem, where MSME Gross NPAs have touched 4.46% at scheduled commercial banks and where lenders are increasingly cautious about unsecured exposure, the presence of collateral is not just about risk mitigation for the lender.
It changes the borrower’s own relationship with the loan. Research consistently shows that borrowers with skin in the game, in the form of pledged assets, have lower default rates. The obligation feels more concrete when the family home or the machinery that runs the business is on the line.
That behavioural dynamic translates directly into a cleaner repayment record, which is the raw material for a good credit score.
For MSMEs in particular, secured loans provide a way to enter the formal credit system without requiring years of audited financials or a long operational history. A small manufacturer who pledges equipment or property for a working capital loan and services it diligently is building something more valuable than just repayment credentials.
They are demonstrating cash flow discipline to a lender, which is precisely the signal that enables subsequent credit at better terms. The shift toward cash-flow-based secured underwriting, now supported by goods and services tax (GST) data and bank API integrations, is making it easier for lenders to see this discipline in near real time rather than waiting for annual balance sheets.
The Longer game
The destination for most borrowers who begin with secured credit is not to stay there permanently. The goal is to graduate: to build a credit profile robust enough that future borrowing requires less collateral, lower documentation, and less friction. This progression is well documented in mature lending markets and increasingly visible in India.
Borrowers who begin with loans against property or gold loans, maintain consistent repayment records over two to three cycles, and then apply for unsecured business credit are finding greater receptivity from lenders. Some fintech platforms now actively track this graduation curve, using repayment behaviour for secured products to pre-approve unsecured credit lines.
For the 63 million MSMEs now registered on the Udyam portal, many of whom are relatively new to formal finance, this pathway has real significance. A first-time borrower who takes a secured loan at 14% and repays it cleanly can reasonably aspire to unsecured credit at 11-12% within three years.
The interest cost reduction on a Rs 50-lakh working capital line at that margin differential is not trivial. Over time, it compounds into a material competitive advantage for the business. Secured lending is sometimes framed as a lesser form of credit access, a concession to borrowers who cannot yet qualify for something better. That framing misses the point.
For millions of individuals and businesses building their financial identities from a thin base, a secured loan that is repaid on time is not a compromise. It is a starting point. The credit system rewards consistency, and secured loans are one of the most reliable ways to demonstrate it. The collateral is temporary, but credit history is permanent.
The author is Co-Founder and Co-CEO of Moneyboxx Finance Limited. Views are personal.
