By Sumit Gupta
Micro Small and Medium Enterprises (MSMEs) are the backbone of India’s over $2 trillion economy. As India seeks to increase the share of manufacturing in the country’s gross domestic product (GDP) to 25 per cent in the next seven years, the estimated 60 million MSMEs in the country assume even greater importance in the Government’s scheme of things. However, growth requires funds, and traditionally, MSMEs have struggled to raise it at the right time, forcing most entrepreneurs to keep their operations small even when they have the opportunity, desire and competence to scale up.
Times are changing. With new age technology and better compliance norms, the modern-day banks see massive growth opportunity in lending to this segment. The role of MSME loans in Indian banking is visible in numbers. In 2017, there was ~32% growth in loans to small businesses in the sub – Rs 10 lakh segment. This can grow many times, as even after such a big leap, only five million MSMEs avail credit from formal banking system.
Most of the times, banks are unable to extend credit facilities to MSMEs due to inadequacy of information about the firm’s financials and project’s viability. To resolve this issue, the government and private sector alike, need to invest in capacity building, awareness of long term impact and adoption of cloud-based solutions for the MSMEs. There is also a need to encourage MSMEs to obtain credit ratings.
As India’s economy gets bigger and formalized, there would be opportunities galore for both public as well as private sector banks to grow their portfolio in the MSME segment. However, formalization brings its own challenges. With goods and services tax (GST) in place, many MSMEs have struggled to shift to the new tax regime in the country. But this is not an hour of crisis, rather it is a moment of opportunity for the forward looking and committed entrepreneurs. Those entrepreneurs, who take this challenge head-on, are likely to see their growth multiply many times in the coming years.
The banks are doing their bit to assist MSMEs adjust to the ‘one nation one tax’ regime by investing in capacity building with various trade associations and creating customized credit products to tide over the temporary financial crunch. Earlier this year, at least one bank launched a credit product (offering up to Rs. 1 crore) to help small businesses avail secured loans based on their GST returns. This product does not require any additional assessment of balance sheet or bank statements. A GST compliant MSME can avail loan within 24 hours.
Newer products are being introduced owing to the digital and technology driven innovations by banks, non-banking financial companies and fintechs, thereby making the sector competitive which in turn helps in bringing down the cost of funding for MSMEs.
India’s MSME base is the largest in the world after China. The manufacturing MSMEs in India contribute just eight per cent to country’s GDP, compared with 60 per cent share in the case of China. If India has to take its next big leap as the world’s next manufacturing powerhouse, this gap must be reduced. The ‘Make in India’ push by the Govt. of India, coupled with significant jump in the FDI flows in the country, are strong enablers for overall growth in the potential for SME sector.
There is no doubt, that overall we are on the right track. We just need to maintain the momentum.
The writer is Group President & Group Head – Rural Banking & Small medium enterprises banking, YES BANK limited.