Despite playing a vital role in the economy, the micro, small and medium enterprises (MSME) sector is gasping for timely and adequate funding from the banking sector. A government survey indicates that 90% micro units in India still procure funding from relatives, friends and private money lenders. Micro-sized units constitute 95% of the MSME sector, with small units making up under 5% and medium-sized units forming hardly 0.21% of the registered enterprises.
The primary challenges the MSMEs face while obtaining funds from banks are delays in clearing the proposals, follow-up with various executives, inability to provide collateral security and insufficient knowledge of financial management.
The financing constraints faced by Indian MSMEs are attributed to a combination of factors. These include policy, legal/regulatory framework, institutional weaknesses and lack of reliable credit information on SMEs. Banks have a traditional methodology of lending to this segment (against collateral and with a linkage to net worth as judged through tax returns) leading to MSMEs ending up being under-financed. Thus, the sector lacks a wide range of financing options and other services crucial to creating a sustainable business model.
The deteriorating global economic conditions leading to liquidity constraints have also affected the growth of MSMEs.
The sector inherently faces some critical issues, like shortage of skilled manpower, lack of capabilities in terms of product and process innovation, inability to compete with bigger players for market share, absence of infrastructure and scope and opportunities for expansion, inability
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