While the micro, small and medium enterprises (MSMEs) form the backbone of India’s economy by generating employment, exports and national output, they routinely face a shortage of affordable finance to meet their working capital demands. High transaction costs and low loan ticket sizes have MSMEs scrambling for funds at short notice, and leave them vulnerable to market fluctuations. With more complicated collateral requirements and high-interest rates thrown into the mix, it’s no wonder that India’s 63.3 million have to face a substantial credit finance gap.
Fixing this scenario is easier said than done. It requires a concerted effort from the government, regulatory bodies, banks and financial institutions, and the private sector as well. For instance, credit guarantee schemes (CGSs) have become more commonplace in the past few years to bridge the gap between supply and demand, and several initiatives by the government and donors are actively resolving the situation.
Such schemes actively make lending more attractive by reducing the risks involved and also help raise the loan funds available. ASEAN countries have many successful examples of CGSs that have been beneficial to targeted sectors, and Indian MSMEs can surely benefit from the learning that such deployments have delivered. However, in economies like India, commercial banks play a dominant role in the banking sector. The objective should primarily be to expand their lending portfolio to SMEs and help close the finance gap.
Here are some ways in which that objective can be achieved:
- Revamping collateral laws – Evolving collateral requirements and the lengthy paperwork required to secure loans can make a difference for MSMEs. Quick approvals and the ability of banks to ascertain working capital needs can go a considerable way in bridging the gap by delivering effective, timely and secured lending.
- Enhancing financial literacy – Many MSME owners remain unaware of the various financial procedures and incentives they have to deal with. Regular and practical financial guidance can alter this situation and provide them with the knowledge to navigate complex fiscal situations. In an ideal scenario, commercial banks should be delivering sound financial management training to MSME owners to manage their funds better.
- Improving credit assessments – With efficient credit rating agencies and independent market evaluators, MSME credit assessments can be made faster and more accurate. This can act as a strong pillar of support for banks when they consider loan disbursals for MSMEs. Currently, they have to undertake lengthy and complex credit assessments, which discourage them from quick endorsements.
- Streamlining insolvency frameworks – MSMEs are often influenced by the country’s insolvency regulations. With higher costs and times associated with filing for insolvency, MSMEs are discouraged from going to court and thus disbanding operations completely. With better insolvency frameworks and mechanisms, MSMEs can feel encouraged to approach the courts for debt restructuring or streamlined liquidation procedures.
- Deploying digitalised solutions – While steps in this direction are already underway, making MSME lending available online can have a long-lasting impact. Online loan applications, quick loan approvals and online assessment and communication platforms can help MSMEs secure funding faster. Online channels also help provide personalised services and assistance, which can aid MSMEs to respond to market conditions in real-time.
Delivering cheap finance to MSMEs is an underrated aspect of every economy, and banks need to be encouraged to reach out to such enterprises. Despite their sizeable economic output, MSMEs are often viewed as worth too much trouble by commercial lenders. Changing this perception is the first step towards bridging the credit finance gap, and this can be achieved through multi-pronged and synchronised efforts by various groups. Reducing the risks involved and diversifying MSMEs’ financing channels should remain critical priorities. All small steps of progress in this direction should become focal points.