The majority of MSMEs struggle or fail to get formal financing through the banking sector. This boils down to due to the incapability of explaining the fundamental business, the business’s viability, and success to financiers, and lack of collateral to avail loans. This restricts credit access to entrepreneurs without adequate property. In India, only 90 lakhs of the 6.3 crore MSMEs are ranked on CIBIL MSME Rank (CMR) (MSME annual report 19-20). This creates massive hurdles for non-registered MSME’s to get financing from Government financial Institutions.
The Total assessed debt demand of MSMEs is approximately INR 69.3 lakh crores (2018-2019), of which only 16% is formally financed. The cost of informal borrowing (~38% 13 14 per annum) is at least twice that of formal borrowing. MSMEs require capital that is affordable, appropriately timed, and on equitable terms. However, the Indian Financial sector has failed to deliver this segment.
Even after growth in financing through Govt FI and NBFCs, MSMEs are still struggling to get funds. The overall financial lending landscape In India is growing, raising questions about the trajectory of growth in funds. At Arth, we looked at this issue and were surprised to find out that there is a 3 percent increase in the share of Working Capital loans (by value) from 62.6 percent in FY17 to 66 percent in FY21, a 15 percent growth in share (by value) of MSMEs in overall commercial loans has been noticed from 16.2 percent in FY17 to 24.6 percent in FY21 and a growth of 33 percent was seen in share by value and 47 percent growth in share by volume of Micro Enterprises among MSMEs from FY17 to FY21.
Through a 3-Tier approach of research, we concluded that the pool size of MSMEs receiving funding has not increased much in the past years, as a result, the new numbers of increased funding are being targeted towards an already existing set of Industries. Newcomers find it exceedingly difficult to find a place at the table, creating opportunities for young Fintech startups to grow in the vacuum.
This will be a major impediment for years to come. The gap between existing MSMEs and the survival of the struggling MSMEs will need to be bridged with the economic growth happening across India. Clearing regulatory hurdles, access to information, and business support for the struggling MSMEs are some areas to begin the journey towards the prosperity of MSMEs.
Kapish Singh Sanga । Strategy and Research Specialist, State Spokesperson – Indian Youth Congress