MSME Finance: Opportunities and Challenges

The MSME (Micro, Small and Medium Enterprises) sector is called the backbone of the Indian economy. Also known as the SMEs, this sector is growing at a rapid pace and has, in fact, emerged as one of the fastest growing in the past decade.

A report from the Ministry of Micro, Small and Medium Enterprises states that the sector accounts for 45% of manufacturing output, contributes more than 40% to exports and is responsible for 8% of India’s GDP. These are impressive statistics, but the SMEs can do much more. India ranks low in World Bank’s Ease of Doing Business Index and a lot of things can be done to help small businesses achieve their full potential.

Here are some of the challenges that need to be addressed on a war footing for further development of SMEs and subsequently, improve their financing.

Outdated Technology

This is a big impediment coming in the way of growth for small businesses. Most SMEs still operate using old technology and are ill-equipped on the modernisation front. Outdated production methods limit their capacity for growth and prevent them from serving new markets. Decrease in efficiency and limited expansion hampers their ability to get credit from banks.

Lack Of Skilled Labour

Skilled labour is needed for businesses to run, and getting them at affordable rates has become very difficult. This void of skilled people in various levels of the organisation gives rise to issues such as managerial incompetence, lack of proper planning and absence of adequate staff training. Only after these issues are recognised and rectified, can a firm grow and procure the necessary funds for achieving success.

Access To Credit

SMEs are run by owners who have a vision and determination to succeed. Although they may have the required knowledge of their field, they are not necessarily well-versed in matters of finance. Therefore, access to credit is probably the biggest hurdle that they face. Tedious loan procedures, huge paperwork, long disbursal periods, collateral requirement and high interest rates are some of the factors that make banks a difficult option for MSME loans in India.

Now, let’s look at some of the opportunities that have cropped up for the benefit of SME finance in India.

Government Policies

Given the enormous contribution of the SME sector towards the Indian economy, the government has taken some steps to give the sector a boost. Various schemes have been announced by the government that offer fiscal incentives for small businesses to grow and flourish. Case in point is the Credit Guarantee Fund Scheme in which the goal is to make available MSME loan without collateral.

Priority Sector Lending

This is an initiative taken up by the Reserve Bank of India (RBI) to promote all-round development of the economy. Under this, commercial banks (public and private) are directed to lend at least 40% of their Net Bank Credit (NBC) and foreign banks are required to lend 32% of their NBC to the priority sectors.

If the banks fail to meet this requirement, then the shortfall is deposited in Small Enterprise Development Fund (SEDF) that is maintained with Small Industries Development Bank of India (SIDBI). Small businesses can make use of this opportunity to get loans from banks.

Digital India

Digital India is an initiative taken by the Government of India. It sets an ambitious target of bringing digitalization into every aspect of business. This move is expected to benefit small businesses by enabling cashless transactions and e-commerce; especially those firms that are in rural areas. Connectivity will help those businesses in rural areas to gain benefit of government subsidies effectively and instantly. It will also help SMEs reach out to customers online and build their brand across the country, and not just locally. 

With Bajaj Finserv, small businesses need not worry about getting access to credit. Our SME business loans are tailor-made to match your diverse requirements. We offer loans up to 30 lakhswithout the need for any collateral.

Also Read: Fundamentals of Business Credit Score