A1. Scale and primacy of trade credit

• Trade Credit (TC) is India’s original working capital engine, long predating formal banking. Business communities like the Marwaris and Gujaratis built vast inter-firm credit networks held together not by contracts or collateral, but by payment discipline-the reliable, timely honouring of obligations.
• This created a self-reinforcing dynamic: payment discipline built reputation, and reputation functioned as currency, unlocking deeper credit, expanding networks, and enabling organic financial inclusion across regions and firm sizes. Even today, ~80 percent of the working capital of MSMEs / traders is funded through TC.
• The Association of Chartered Certified Accountants (ACCA), London, has emphasised that trade credit is ‘the easiest and most important source of short-term finance,’ underpinning ~50 percent of global B2B transactions. Historically, British banking evolved from the systematic discounting of trade bills. Across major economies - UK, China, Italy, Japan - it rivals or exceeds bank working capital (over 15-30 percent of firm assets in advanced economies, higher in emerging markets). It acts as a built-in stabiliser when banks tighten lending and plays a critical, often underappreciated role in inter-firm financing, especially for MSMEs.
• RBI’s 38-year (FY1986-2023) corporate database shows sundry creditors consistently at ~16-17 percent of sales, versus bank working capital at only ~8-14 percent of sales. This confirms that trade credit is the dominant financing channel even for corporates. As shown in Table 1, among 24 manufacturing Nifty-50 companies, the gap is starker: supplier credit stood at 19 percent of sales versus bank WC stood at only 3 percent, indicating trade credit is not solely an MSME phenomenon. An RBI study of ~1,900 nongovernment, non-financial public limited companies similarly found trade liabilities at 19–24 percent of total liabilities, compared to bank credit of only 11–14 percent during FY1992–2003 (RBI Bulletin, November 2005).
• India’s MSME sector faces a structural credit gap of INR ~25–30 trillion (IFC estimate: INR 25.8 trillion in 2018), with total demand of INR ~37 trillion far exceeding formal credit supply of INR ~14.5 trillion (2019); SIDBI estimates the gap at INR ~30 trillion now. This vast unmet credit need is largely bridged by trade credit-underscoring that the banking system’s structures, risk frameworks, and operating constraints are not fully equipped to serve the diverse, granular, and dynamic credit needs of the entire MSME sector.
  The INR 10.7 trillion locked in delayed MSME receivables in FY2021 alone signals the sheer scale of trade credit volume. It affirms trade credit as the foundational, economy-wide source of working capital

A2. Trade credit and bank credit: Inter-dependence, interconnection, and transmission

• TC and bank working capital are deeply interlinked and cross-connected across payments, common credit exposure, financial intermediation, and NPA formation.
• Bank credit ultimately passes through TC chains to reach real economic activity; TC is the principal transmission channel of bank credit into the real sector.
• Every firm that sells on credit is, in effect, a financial intermediary like a bank, providing credit, absorbing risk and transmitting liquidity along the supply chain.
• Changes in the volume, composition and distribution of TC are important variables affecting monetary policy transmission - an interconnection that the RBI's policy frameworks have not yet fully internalised.
• Network effects in TC are strong because firms are simultaneously lenders and borrowers; a disruption at any node propagates across the network, amplifying both liquidity stress and credit risk.

A3. The role of Adhtiyas and informal credit markets

• Historically, Adhtiyas and moneylenders bridged payment mismatches through fast, trust-based and inclusive liquidity support. Their post-COVID withdrawal has virtually dismantled this buffer, amplifying supply-chain stress, MSME liquidity constraints and systemic risk.
• How have suppliers responded to rising payment uncertainty? They have been shortening credit periods, preferring cash or advance payments, tightening buyer selection, and withdrawing from financing to address payable-receivable mismatches. Reduced informal credit supply further weakens suppliers’ capacity to absorb delayed payments, feeding a deepening cycle of defaults and withdrawal.
• Systemic macroeconomic damage: The erosion of informal credit intermediation, without a compensating rise in formal credit, spills from firm-level stress into macro fragility. It tightens liquidity for small firms, suppresses MSME output and jobs, disrupts supply chains, raises reliance on costlier credit, weakens monetary transmission, and amplifies downturns, undermining growth, financial stability, and overall economic resilience.