Financing of Micro, medium and small scale enterprises in India Key Challenges

Abstract

Micro, small and medium sector have a vital role in in the economic growth of a developing nation like India. These play a catalyst role in the development of industrial and commercial activities. In the overall value chain of different industries these firms are placed in critical positions. It is, therefore, imperative to focus on the issues which impact the creation, survival and growth of the firms of the sector. One of such prime issues is the need of credits by these firms. This paper delineates the need of greater attention on the financing requirement of MSME sector. The firms need credit assistance at different stages of their life cycle. The unique characteristics of this type of firms imply that their credit needs deserve focused attention. Therefore, the banks and other financial institutions have the responsibility to offer such credit products and financing schemes which address the requirements of MSME sector. In meeting this financing requirement, problems may arise with respect to asset quality of the financial institutions. In order to promote the sector, there is a need to create an enabling environment which can ensure credit flow and at the same time address concerns regarding management of credit made to the sector. The challenges faced by Micro, Small and Medium Enterprises (MSME) sector arise from multiple factors. These being small in sizes have limited ability to withstand any economic shock. They are generally running with inadequate amount of capital. A large number of depend completely on the owner's capital and revenue from the businesses, without borrowing funds from financial institutions. It naturally inhibits their potential to grow their businesses. Many of the concerns of this sector like low technology level, lack of product variants, inability to increase manpower etc. cannot be addressed without adequate and timely availability of credit. It is only when these are adequately funded, would they be able to invest in creating distribution network, brand building, technical know-how, RD on the other hand, due to lack of adequate working capital they find it difficult to continue their existing operations. The concerns are not confined to issue of credit availability; it's also about cost of credit. If the cost of credit cannot be made attractive for the borrowers of this sector, loan disbursal cannot be improved. The MSME sector, therefore, urgently needs more capital at a reasonable cost. The availability of funding can help it to address some of its key concerns. It needs more seed capital to start new ventures. Long term capital is needed to help the to invest in infrastructure in terms of land, plant & machinery, technology sourcing etc. and to augment its operations. Working capital is required to mismatch between payables and receivables and to ensure uninterrupted running of operations of the business. In the face of global and national-level competition, flow of funds is critical for the survival and growth of MSMEs. Not only these firms need debt financing, the growth cannot take place without equity financing. There is a possibility of growing firms taking only bank finance, getting over-leveraged. At that point further bank financing is hard to get. Therefore, the MSMEs can grow by having the access to both debt financing and equity financing options. SOURCES OF FINANCING FOR MSMES: The MSMEs in India largely depend on self-finance. As per the fourth census of MSME sector 87.23% of all were found in the category of taking self-finance/No finance. This high percentage of units depending on self-finance/No finance can be a result of high proportions of units falling in enterprises category. Micro comprise 94.94% of all the MSME units in India, whereas the share of small is 4.89% and that of medium is only 0.17%.