Addressing the MSME Debt Gap
Addressing the MSME Debt Gap
The MSME sector in India is highly heterogeneous in terms of the size of the enterprises, variety of products and services, and levels of technology adoption. The sector makes significant contributions to India’s overall GDP, exports and employment growth. In 2012-13, MSMEs formed 37.5 percent of the India’s total GDP and has since been growing steadily. The manufacturing sector accounts for an estimated 29 percent of total enterprises in the MSME sector, while the services based enterprises form the remaining 71 percent; totaling 21.43 million formal enterprises.
Finance as an enabler of growth
One of the key enablers of economic growth in the MSME sector is the availability of finance. For MSMEs, finance includes equity capital, loans for fixed asset investment and working capital for meeting cash flow gaps. Despite the gradual rise of financing directed towards MSME, it is still considerably lower taking into account the overall capital demand of the sector.
There is a total demand-supply gap of INR 3.57 trillion for the MSME sector, (after excluding debt and equity demand). This opens incredible opportunities for formal financial institutions to tap. The viable debt gap that can be addressed by formal financial institutions in the near term in the manufacturing and services sector is INR 2.15 trillion ($42 billion) and INR 0.78 trillion ($16.6 billion), respectively.
Differentiated finance options for MSMEs
Growth is fundamental to the success of any business or enterprises. The biggest barrier in the development and growth of MSMEs is their inability to obtain external or internal financing, which may affect starting capital, start-up costs, requirements for buying (expensive) raw materials, high wholesale prices amongst a host of other financial needs.
Access to sufficient funds that can be channeled to meet fixed capital and working capital requirements are one of the most important elements of this progress. Finance thus becomes one of the most critical inputs for growth and development of MSMEs. They need financial support not only for the running and upkeep of the enterprise but also for diversification, modernization, upgradation and capacity building to name a few measures.
Alternative sources of finance can, therefore, step in an assist MSMEs in their growth and development. In recent years, a plethora of alternative finance options have emerged and have proven to be an important and integral source of financing for Indian MSMEs. The idea of “one size fits all” does not make much sense in a competitive environment.
There is a need to create a differentiate narrative for the MSMEs. MSMEs need customized financial products that cover life cycles of their enterprises. Banking and financial institutions have a huge opportunity of viable business from MSMEs because this sector stands as a strong pillar of inclusive growth in an economy. Financial institutions have the challenge to customize their products to meet the innovative needs of MSMEs at competitive rates for the sector to grow.
Judging from the growth numbers and the existing economic and political climate, MSMEs are wont to occupy the central place as engines of growth for India’s economy. This has been proven by the present government’s recognition and emphasis on the Make in India programme. MSMEs present a significant business opportunity for both banks and finance organizations. Financial exclusion is high in the MSME sector and access to adequate and timely credit is still a critical question for them to steer towards growth and multiplying opportunities.