Financing MSMEs in 2021: Challenges & Opportunities

MSMEs (Micro, Small, and Medium Enterprise) have been the lifeblood of India’s economic growth story. The sector alone accounts for approximately 30% of the country’s GDP and 48% of India’s total exports. This makes MSMEs a crucial gear for employment generation, which offers a top-down equitable distribution of wealth in the industry. However, the sector has seen sluggish growth in recent years. This is primarily due to the low penetration of formal forms of credit to fund working capital requirements.

A recent report found that the MSME sector had an estimated credit gap of ₹20–25 trillion. This has led to an unprecedented number of MSMEs being forced to shut shop and large-scale unemployment. The situation has been worsened by the heightened impact of Covid-19 and the impending lockdowns. This article looks at the challenges and opportunities that face MSMEs in 2021 and how access to low-cost forms of credit will play a key role in its comebank.

 Challenges that Face MSMEs

With the rise of NPAs, traditional Banks are reluctant to lend due to the high perceived risks. This has resulted in MSMEs depending on informal credit avenues like local lenders. However, to stay afloat, SMEs are having to cough-up large sums of cash in the form of high-cost loans. Another issue is that there aren’t enough local credit avenues to sustain the needs of SMEs, this has led to the rising credit gap in the sector. For most businesses to survive, the need of the hour is access to credit that is both timely and low-cost.

Government Intervention

Government intervention will play a key role in the revival of MSMEs. A key measure will be to provide easy and low-cost access to credit. Although successive governments have focused on developing credit and liquidity related policies, it really hasn’t had the intended results. During the Union Budget 2021-22, the government announced a slew of key initiatives to support MSMEs. With this announcement, the government has set aside a whopping 15,700 crores to facilitate credit to MSMEs working in specific sectors. In addition to the focus on financial inclusion, Budget 2021-22 also focused on promoting domestic manufacturing that benefits the MSME sector. This is part of the push towards the Atmanirbhar Bharat program that encourages local manufacturing where MSMEs will play a key role.

A Shift to Digital

If the Covid-19 has taught us anything, it’s the need for a transformation to digital forms of doing business. This holds true for most businesses with MSMEs being no exception. SMEs that managed their business online, before the pandemic hit, fared considerably better than businesses that were struck with this sudden change. Digitization had allowed businesses to continue operations and even remain competitive during these trying times. For example, a large number of local Rajasthani handicraft stores that had presence online, managed to retain demand for their products. The demand for online services has consequently gone higher, with an increasing number of local businesses going digital.

Low-Cost Business Loans

With Banks being reluctant to lend, a large number of NBFCs are moving into the lending space. Companies like Bajaj Finserv Markets are offering attractive business loan interest rates. SMEs can get access to quick and easy cash so they remain funded with the required working capital to sustain their business. SMEs can borrow as high as ₹35,00,000 with flexible repayment options that don’t overburden the business’ income statement.

Since most SMEs struggle with furnishing the collateral needed for financing a loan, many businesses turn away from this idea. This is especially true for new entrepreneurs, who are cash-strapped to begin with. NBFCs like Bajaj Finserv Markets have moved away from traditional lending practices by offering business loans in the form of unsecured loans. This means that borrowers do not have to pledge any collateral or security against the loan. This gives SMEs the freedom to borrow as much as they need to fund their business. They can use the funds to revamping existing company infrastructure; enhance operational efficiency by purchasing machinery; or move their business online.

Final Thoughts

The revival of the MSMEs sector will be the key to driving growth in the country. A healthy MSME sector will have a domino effect on a number of sectors, which will give rise to greater employment and more equitable growth. Financing will play a critical role in how this sector emerges and competes at a global level. The support of government initiatives and private partnerships to assist in closing the credit gap will be the big push going forward.