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Financing Opportunities for MSMEs in India

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Micro Small and Medium Enterprise

The Micro Small and Medium Enterprise (MSME) sector in India is quintessential to achieving the targeted growth rate of our nation. The sector nurtures and breeds budding entrepreneurs and irrigates innovation at its most rudimentary level. By and large, MSME has made a tremendous contribution towards the development and growth of the Indian Economy. In the most basic form, the sector has provided employment opportunities to millions and has been playing a vital role in the growing the manufacturing output of our country.

According to act of 2006, enterprise with capital <10 Crores in case of Plant, Machinery and equipment and <5 Crore in services is regarded as MSMEs.

Importance of MSMEs in the Nation’s Growth

MSME sector has dual characteristic, as it acts as an ancillary unit to larger industries, while on the other hand it does not necessitate huge investments, making it easy for entrepreneurs enter the market. Growth in sector implies industrialization in backward areas and also indicates a more equitable Gini-coefficient with the proper distribution of wealth among people. Statistically a growth of 12% was seen in the sector for the past 5 years and the sector has helped in raising the share of manufacturing sector in GDP to reach 16 %. With innovation, disruptive technology etc. becoming the need of the hour, it is important that the country focuses more on robust MSME sector which will help in accelerating the growth rate.

Problems of the MSMEs

As a matter of fact, despite the sector showing impressive development and growth, the Indian Manufacturing sector is still in its infancy. Some of the key problems faced by the MSMEs are as under:

  • High cost of credit which does not reach them on time
  • Scanty capital infusion compounded by insufficient data on credit requirement

The state governments prioritize the investment sourcing in the sector knowing its potential. In recent policy reform, it was announced that the GoI will double the credit flow to MSMEs in 5 years only to help enhance the growth. The credit will be made available with commercial banks acting as the major source. It is found that until recently the capital infusion in the sector is funded by the traditional sources like ancestral capital, retained earnings, personal saving, etc. Despite the availability of the financing options, the poor implementation is a hindrance in the execution of the credit system. Some of the few innate operational hindrances acting as a barrier to the functioning of the sector were recently undertaken for evaluation under Prime Ministers Task Force. Despite the setting up of task force and several recommendations, the financial glitches still exists. MSME currently requires adequate capital infusion through term loans/working capital loans etc. so as to help the sector and the company to grow. The current availability of expensive credit from unregulated lending markets needs to be checked to ensure transparency. High cost due to costly credit leads to the inability of the companies to upgrade to better technology in a timely manner. The problem with upgradation of technology, etc. prevents the companies to keep pace with global market changes.

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Thus to narrow down the findings, it can be said that the government with the help of several public sector banks needs to design proper instrument for financial assistance to the MSMEs. Access to equity capital, stock market, bond market, etc. should be made available to the sector. Also support from venture capitalists needs to be improved so as to put forward a solid base for future growth. Thus the challenge for the sector is to get over the liquidity crisis that is currently present in order to utilize the nursery of innovation and entrepreneurship present with the sector.


Niraj Satnalika

Niraj is an MBA in International Business (Finance). Prior to this he completed B.Tech in Electronics and Instrumentation. He is currently working with Confederation of Indian Industry (CII), Kolkata in capacity of Consultant. Satnalika is actively involved with an NGO and works towards promoting education among the underprivileged.

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