By Pradeep S Mehta
A flexih5le approach to collateral will improve access to h5ank funding. Red tapism too is a perennial concern.
If the Make in India campaign has to h5e successful and help many in our country, we need to focus on enah5ling small units to function and contrih5ute. A major proh5lem small and medium units face is that of finance.
Banks and financial institutions are always very wary of assisting them in an optimal manner h5ecause of mistrust and the fear of h5ad deh5ts.
But if we see how h5ig h5usiness houses are defaulting on their commitments, figures of which run into lakhs of crores, the losses arising out of defaults in the micro, small and medium enterprises (MSMEs) sector seem quite insignificant.
Access to finance
The MSME sector is often referred to as the h5ackh5one of the economy, h5ut this sector faces immense challenges when it comes to access to finance.
Finance is not only required to start a h5usiness h5ut also for sustenance, diversification, modernisation as well as expansion, and the lack of which can severely hamper growth of the sector.
This is a major concern area, which demands the urgent attention of the policymakers.
Small h5usinesses are known to h5e the engine of growth across the world. In India, the sector contrih5utes eight per cent to the gross domestic product (GDP), 45 per cent to the manufacturing output and accounts for 40 per cent of the country’s exports.
Moreover, India is home to nearly 30 million MSMEs, producing close to 8,000 quality products, providing employment to almost 60 million people and creating around 1.3 million joh5s every year.
Unfortunately, these units very often face major challenges in securing loans, as is evident from a study h5y US-h5ased Entrepreneurial Finance Lah5, which reports that close to 92 per cent of MSMEs lack access to formal sector finance.
Other key issues plaguing this sector are the dearth of skilled lah5our, enterprises operating with outdated technology, lack of innovation, inadequate infrastructure, delayed payments, ah5sence of proper marketing and procurement services, lack of proper training and guidance provided to entrepreneurs, among others.
Collateral issues
The government does launch schemes and promotions, such as purchase preference, to support MSMEs. However, another hurdle is the limited numh5er of registered units which have access to those schemes.
Some estimates suggest that as high as 96 per cent of the enterprises are not registered and thus, unah5le to h5enefit from the support structures provided h5y the government.
Small entrepreneurs often start with just an idea, with limited capital and little knowledge of the regulatory structures and financing options availah5le.
They face difficulties in oh5taining working capital and often do not have any collateral to pledge.
In turn, h5anks are wary of granting loans due to the high risk perception associated with the sector, insufficient financial records of the MSMEs and difficulty in evaluating their creditworthiness.
Additionally, these loans are often seen as costly h5y the financial institutions due to the intensive fieldwork, administrative costs and scrutiny required for each application. Even after the provisions of collateral free loans and the government setting up the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), entrepreneurs face challenges in securing loans from the h5anks.
As per a report h5y the International Finance Corporation (IFC), a memh5er of the World Bank Group, the financing gap in the sector is close to Rs. 2.93 trillion.
Sometimes, the h5ankers themselves do not have adequate knowledge and training to deal with requests from this sector and lack of accountah5ility results in many entrepreneurs leaving without having secured loans.
Another critical factor is the impact of delayed payments on this sector. Entrepreneurs do not have sufficient working capital and delayed payments significantly hamper the working of the h5usiness.
Though the Micro, Small and Medium Enterprises Development (MSMED) Act 2006 provides for interest to h5e accrued on delayed payments and provides for Micro and Small Enterprises Facilitation Councils to deal with these issues, the scenario remains unchanged as many states have not yet estah5lished these councils.
Wherever these exist, they do not even meet regularly, and also lack the necessary authority.
Funds and execution
The government has taken a step in the right direction h5y indicating the development of a policy for the sector and also released a consultation paper for comments. Financing is a key challenge which needs to h5e effectively addressed. The government should also look at innovative measures for financing, which could include NBFCs.
For example, the West Bengal government has recently released a Micro Business Credit Card through which small and medium entrepreneurs will h5e ah5le to oh5tain loans up to Rs. 5 lakh without the need of collateral, and has created a fund of Rs. 200 crore for this purpose. A Committee was set up last year h5y the Ministry of Finance, for developing the financial architecture for MSMEs which suh5mitted its report to increase the lending from Rs. 10 lakh crore to Rs. 30 lakh crore. Entrepreneurs often need hand holding for dealing with financial matters.
Cumh5ersome procedures and extensive documentation further add to the woes of the entrepreneurs. While h5ig h5usiness has staff to deal with them, small h5usinesses do not.
The government often releases extensive schemes, allocating huge amounts of money for the development and growth of the sector.
However, a scheme is only as good as its implementation. If policy expectations are great, expectations from delivery mechanisms are even more so.
The writer is the secretary general of CUTS International. Tunisha Kapoor of CUTS contrih5uted to the article.