Lack of transparency, small-ticket projects, inability for collateral requirement, etc, are the reasons for below-potential credit delivery to MSMEs, and most face poor access to finance within a system dominated by banks.
The recent spat between the government and RBI on relaxing stressed assets classification rules to support MSMEs with more liquidity is understandable. India has 6.339 crore MSMEs (6.3 crore micro, 3.3 lakh small, 5,000 medium units). They contribute 32% of total value-added and employ 11.1 crore workers, and have a major role to play for ‘Make in India’ to succeed as one-third of them are engaged in manufacturing activities and contribute about half the manufacturing output. MSMEs are labour-intensive and have a huge potential to generate jobs. The government is keen to ensure better credit flow to MSMEs, but needs to do far more than partially improving access to finance.
Lack of transparency, small-ticket projects, inability for collateral requirement, etc, are the reasons for below-potential credit delivery to MSMEs, and most face poor access to finance within a system dominated by banks. Bank credit to MSMEs as a percentage of GDP is around 6%—less than one-sixth of the levels seen in South Korea and China, and one-fourth in Thailand and Malaysia. As per the International Finance Corporation, the total financing demand of Indian MSME sector is Rs 32.5 lakh crore, but availability of funds, both internal and formal finance, is Rs 14.6 lakh crore. So, MSMEs are grappling with a formal credit gap of Rs 17.9 lakh crore, i.e. 56% of total demand.
Banks hesitate to grant loans due to lack of transparency, lack of financial discipline, high administrative costs of small-scale lending, high-risk perception, and lack of collateral. Another reason is high mortality rates of MSMEs—financial institutions are doubtful about their survival and growth and, therefore, under-financing happens.
According to the Federation of Indian Export Organisations, MSME units, particularly in labour-intensive sectors such as gems & jewellery, leather & leather products, RMG of all textiles, jute manufacturing including floor covering, carpets, handicrafts, agri-products and other sectors of exports, are either showing modest growth or are into negative territory. These sectors face liquidity crunch as banks and lending agencies have been tightening lending norms. MSMEs also face difficulties in raising funds from non-bank finance instruments, especially from the capital market.
They play a critical role in helping low-skill workers transition out of traditional sectors into more productive ones, facilitating integration with global value chains (GVCs) and significantly contributing to output. Evidence from OECD and from China and Thailand shows that MSMEs are prime drivers for participation in GVCs. For example, 95% of enterprises in the OECD area are MSMEs, and in China, the Philippines, Thailand and Vietnam MSMEs are important drivers for their integration with GVCs. Over 80% of world trade takes place through GVCs, but Indian economy is least integrated with GVCs. Also, the growth MSMEs is essential to create decent jobs; estimates from NSS 2011-12 show that daily wage rates are much higher in enterprises with more than 20 employees.
Many schemes have been introduced to address these challenges, but problems have happened at implementation level—low procurement by PSUs as compared to target level, poor monitoring of financial accounts, delayed payments, absence of hand-holding, etc. Also, India has brought MSME schemes under DBT for reforming government delivery system. As on December 31, 2017, it was seen that much of the benefits of schemes and total expenses are skewed towards a few, such as Prime Minister’s Employment Generation Programme, Credit Linked Capital Subsidy Scheme, and Performance & Credit Rating Scheme. Also, the total expenses for schemes related to marketing assistance, IPR building awareness, etc, are marginally low in the current Budget allocation. This means that MSMEs are either reluctant to take benefits through DBT as they have to become part of the formal economy, or are ill-informed about the schemes.
Most schemes have emphasised on providing a package of required ingredients for MSME such as meeting credit requirements, facilitating technological upgrade, etc. In addition, the schemes do not emphasise on hand-holding at every step, which is a key factor for success. MSMEs require a holistic support, starting from access to raw material, production processes, product design and development, access to markets, etc. However, most schemes have addressed these issues partly and require a serious re-look by the government and organisations supporting MSMEs.
The author is Professor, Institute of Economic Growth, Delhi. firstname.lastname@example.org