BANK CREDIT - THE FUEL TO DRIVE SME INDUSTRY

THE MSME SECTOR IS A NURSERY OF ENTREPRENEURSHIP, OFTEN DRIVEN BY INDIVIDUAL CREATIVITY AND INNOVATION, ESPECIALLY IN AN ECONOMY LIKE INDIA

The role of micro, small and medium enterprises (MSMES) in the economic and social development of the country is well established. India has approximately 6.3 crore MSMES. The number of registered MSMES grew 18.5% Y-O-Y to reach 25.13 lakh (2.5 million) units in 2020 from 21.21 lakh (2.1 million) units in 2019.The Indian MSMES sector contributes about 29% towards the GDP through its national and international trade.

According to government data, the registered MSME is dominated by micro enterprises at 22.06 lakh (2.2 million) units in 2020 from 18.70 lakh (1.8 million) units in 2019, while small enterprise units went up from 2.41 lakh (0.24 million) units to 2.95 lakh (0.29 million) units. Midsized businesses only increased from 9,403 units to 10,981 units during this period.

MSMES are being encouraged to market their products on the e-commerce site, especially through Government e-marketplace (GEM), owned and run by the government, wherefrom Ministries and PSUS (public sector undertakings) source their procurement. The platform has recorded transactions worth Rs. 55,048 crore (US$ 7.5 billion) until September 2020.

Domestic business requires a strong financial stimulus with concessional working capital loans to ensure adequate liquidity is maintained in business operations from the government and financial institutes.

The Government of India has envisioned doubling the Indian economy to US$ 5 trillion in five years. In order to achieve this goal, career opportunities for the young population have been generated and MS ME Shave the potential to serve as a key employment generator. Therefore, the government has taken up promotion of MSMES in order to create new jobs in the sector. Further, the government aims to enhance MSME’S share in exports and its contribution to GDP.

In order to achieve these targets, the government should invest in providing more back-end services to improve performance of the MSME sector as it supplies goods and services to big industrial enterprises. Lack of technologybased production activities and low investment in R&D activities are bottlenecks hindering the sector to become competent. Globally available technology could be subsidised by the government so that the product quality of MSME players can be improved using the existing resources. This also requires the help of academic institutions in the form of providing research and development (R&D) services for product innovation.

Indian banks are working with a vision that borrowers at the bottom of the pyramid should have access to credit at affordable cost to take their dreams forward. Further, it has also been observed that a number of micro finance borrowers having potential to scale up their operations were not able to take it up to enterprise level on account of not having access to credit at affordable rates. Banks have been identifying these critical gaps in the credit delivery mechanism of mass market banking which have been the main hindering factors in the enterprise promotion from livelihood. It is observed that if credit is made available at affordable rates to such micro finance borrowers who have already availed three to four cycles of loans from MFIS, it may help in a big way in promoting the enterprises and scaling up their business.

Credit is the lifeline of any business and SMES are no different. But three major factors have prevented financial institutions from extensively lending to micro-entrepreneurs and MSME enterprises. First, reliable data/information from these organizations are often unavailable, creating unforeseen lending risks. Banks are mostly unable to gauge the creditworthiness of SMES and thus charge higher interest rates from such institutions to mitigate their risk, thereby making financing difficult. Second, there is a lack of access to collateral/quality collateral from most micro-entrepreneurs and MSME enterprises. Third, there is a need for the local presence of banks for sourcing and collections.this may not necessarily be optimal for banks to do from a cost perspective.

SMES will need to innovate using data to minimize credit risk. For example, the extensive use of analytics is the need of the hour to determine whether predictions, harvest patterns, construction growth rates and other important aspects, enabling financial institutions to predict the future economic conditions of such businesses. Secondly, a strong monitoring architecture needs to be setup to analyse sudden changes in the behaviour of customers with regard to repayment delays and increasing Portfolios at Risk (PAR). Floating rapid response teams could also help to address such issues dynamically. third ly, financial institutions need to distribute portfolios across states in India, expand to new geographies to avoid region-specific shocks and to increase their reach across the country. Fourthly, MFIS should work out ways of reaching the missing middle (with loan requirements within Rs 50,000 to say Rs 500,000), that is, micro-entrepreneurs and unorganized MSMES for the next wave of growth.

Our MSME Policy must encourage establishment and growth of our units. Let it be understood that big businesses evolve from small business only and go on to become several large companies. Examples range from Honda to Microsoft globally and from Infosys to HCL in India.the first objective of this Policy thus must be not only to encourage establishment and growth, but also, emphasise on growth.

A major reason behind the hiccups faced by new SME is not lack of profit but due to lack of access to credit. What are the steps that should be undertaken to ensure that there is flow of credit to MSMES? Can a credit bureau to record SMES credit history for the banking sector’s risk evaluation and loan appraisals? The high interest rates often make an otherwise internationally competitive MSME loose with competitive edge. On the other hand, a broad debt is available at the extremely low rate of interest.

While one end of the MSME spectrum contains highly innovative and high growth enterprises, more than 90 per cent of MSMES are unregistered, with a large number established in the informal or unorganized sector. Besides the growth potential of the sector and its critical role in the manufacturing and value chains, the heterogeneity and the unorganised nature of the Indian MSMES are important aspects for policy making and programme implementation.