Credit and Finance for MSMEs: Even as Indian MSMEs continue to struggle with access to low-cost credit, a majority 67 per cent of finance supply for small businesses in India comes from informal sources.
Credit and Finance for MSMEs: Even as Indian MSMEs continue to struggle with access to low-cost credit, a majority 67 per cent of finance supply for small businesses in India comes from informal sources such as money lenders, friends and family etc.according to the data compiled by consulting company Dun & Bradstreet (D&B). Another 21 per cent comes through equity finance while 12 per cent is sourced from formal sources including non-banking and government institutes, small banks, public sector banks, private sector, and foreign banks, it said based on data from its own research, IFC, and World Bank. The total demand for finance by MSMEs stands at Rs 87.6 lakh crore out of which debt demand has been Rs 69.2 lakh crore and equity demand at Rs 18.4 lakh crore.
“Formal sources need to become bigger. Overtime credibility will be coming in the industry that will help MSMEs earn more credibility and hence get borrowing from formal sources. Formal sources will find a way to lend profitability to MSMEs and make money out of it,” Manish Sinha, Managing Director, Dun & Bradstreet India told Financial Express Online. Importantly, the data noted that MSMEs having access to finance have higher returns on capital and higher profitability. For every incremental Rs 100 borrowed, small businesses generate Rs 73 marginal return on capital. “Profitability of MSMEs that earn a marginal return on capital is very healthy,” said Sinha.
MSME Minister Nitin Gadkari had in October this year said that the ministry is seeking sanctioning of Rs 10,000 crore fund by the Finance ministry to buy equity in MSMEs looking to list on the stock exchanges. The government currently runs multiple schemes for funding to MSMEs including Credit Guarantee Trust Fund for Micro & Small Enterprises, Prime Minister’s Employment Generation Programme, Interest Subsidy Eligibility Certificate, Credit Linked Capital Subsidy for Technology Upgradation etc.
However, the credit growth to MSMEs has contracted by 3.85 per cent in the current financial year, according to October bulletin of the Reserve Bank of India, while the shrinkage in the micro and small enterprises (MSE) was higher than that in the medium enterprises. For MSEs, the amount shrunk 4.4 per cent from Rs 3.75 lakh crores in March 2019 to Rs 3.58 lakh crores in August 2019. For medium businesses, it contracted by 1.8 per cent. Moreover, public sector banks total credit outstanding to the MSME sector increased by 7.38 per cent to Rs 8.81 lakh crore in FY19 from Rs 8.20 lakh crore in FY16, according to the RBI data.
Nitin Gadkari has been stressing on growing the MSME sector’s GDP contribution from 29 per cent to 50 per cent in five years to contribute to India’s aim to become a $5-trillion economy by 2025. For this, making available low-cost finance, developing more clusters for building competitiveness and providing market access are three critical areas, said D&B. “While micro and small enterprises struggle to grow. In fact, they don’t even become medium enterprises. Universally, this applies to all sectors and geographies. By and large, most of the effort has to come from the government and private sector,” said Sinha.