Reduced interest rates, less collateral, and improved access to credit will give a boost to the sector
India’s micro, small and medium enterprises (MSME) sector, known as its engine of growth, contributes 31 per cent of its GDP, 45 per cent of exports, employs over 124 million people and creates nearly 1.3 million jobs every year. The entrepreneurial growth and development they contribute are not restricted to the urban areas only. Of the 55.8 million MSMEs, 59 per cent are based in rural India.
But the absence of adequate and timely bank finance, high cost of credit, non-availability of suitable technology and over-regulation impede the growth of this sector.
Among the aforementioned constraints, the availability of finance and financing costs are the two key factors that directly impact the growth and survival of the manufacturing and services MSMEs. As per the IFC report 2018, the overall finance demand by MSMEs is estimated to be about ₹87.7-lakh crore of which about ₹69.3-lakh crore is the debt requirement. Of this, about ₹48.5-lakh crore is required for working capital and ₹20.8-lakh crore is the capex investment required for fixed assets.
But of the total debt requirement of ₹69.3 lakh crore ($1.07 trillion), only ₹10.9 lakh crore is raised from formal sources and as much as ₹58.4 crore is raised from informal sources.
Though private and public banks, NBFCs and FIIs all make up the formal financial ecosystem to provide the desired capital, there is a huge gap in catering to the financing requirement of the MSME sector .