Why FISME’s plea for distressed MSME funding is a risky gamble

I have spent enough time in the trenches of the Indian startup ecosystem to know that when an industry body like FISME calls for a bailout, it is usually because the water has crossed the neck. Their latest pitch? Tapping into the government’s new 10,000-crore SME Growth Fund to rescue MSMEs that are already drowning in debt—specifically those labeled SMA-2 or worse, NPAs. On the surface, it sounds like a compassionate safety net. If a business is just facing a temporary cash flow crunch, why let it die, right?

But let’s look at the unit economics of this plea. Banks mark an account as SMA-2 when payments are overdue by 61 to 90 days. An NPA is the final stage of failure. FISME wants the government to inject equity into these sinking ships, provided there is a 'credible revival plan.' Here is my skepticism: who decides what is credible? If a business has already hit the NPA stage, the traditional financial system has already deemed its operational model, management, or market fit as faulty. Plugging equity into a leaky bucket is a dangerous game that usually ends with taxpayers footing the bill for 'zombie' companies.

From a founder’s perspective, I get the pain. Capital in India is expensive, and one bad quarter can spiral into a debt trap because we lack a robust, quick exit or restructuring mechanism. However, using a growth fund for debt restructuring is a fundamental mismatch. A growth fund is meant to pour fuel on a fire that is already burning bright. Using it to clear bad debts is essentially institutionalizing inefficiency. If we start bailing out businesses that have already failed their debt covenants, we create a massive moral hazard. Why should any entrepreneur focus on lean operations or risk management if they know the government might just step in with a rescue package when things get messy?

If we really want to help the MSME sector, we don't need more funds to patch over bad balance sheets. We need better credit scoring, faster insolvency resolutions, and a culture that views honest failure as a learning curve rather than a terminal diagnosis. Protecting jobs is a noble goal, but trying to keep unviable companies on life support only drains the resources that could have gone to the next generation of high-growth, innovative startups.

What happens next? The government will likely tread carefully. They want to avoid a massive spike in NPAs, but they also cannot afford to turn a growth fund into a glorified loan restructuring agency. If this proposal gains legs, it will set a precedent that will keep bad debt in the system for years. Are we solving the MSME problem, or just buying a more expensive headache for later? I’d love to hear your take—is this a lifeline for the backbone of our economy, or just throwing good money after bad?