The majority of them raise funds through un-organised channels which include informal financers, friends, family etc.
The study titled ‘Indian Banking Industry: Sustaining Growth with Equity,’ jointly carried out by ASSOCHAM and Resurgent India said that, “Lack of adequate finance due to shortage of organized lending from banks and other formal sources of finance together with absence of transparency regarding their financial condition is proving to be a stumbling block in growth of MSMEs in India more so in eastern and north-eastern pockets of the country which are grappling with significant dearth of basic infrastructure like roads and electricity.”
Indian MSME sector is currently running under debt finance demand of Rs 32 lakh crores, of which only Rs 6 lakh crore is financed through formal sector. Public sector banks (PSBs) account for over 70 per cent, while private and foreign banks for over 20 per cent of credit flow respectively to the sector.
D.S. Rawat, secretary general of ASSOCHAM said while releasing the study, “MSME sector plays a pivotal role in India’s economic and social development as the sector accounts for about 45 per cent of India's total manufacturing output, about 40 per cent of India's total exports, thereby employing over seven crore people in over three crore units spread across the country manufacturing over six thousand products ranging from traditional to high-tech items.”
Rawat held demand-supply constraints responsible for the financing gap prevailing in the sector despite corrective measures like priority sector lending norms implemented by the Reserve Bank of India (RBI). “There is a need to secure transparency of financial conditions amid MSMEs as it influences decisions on loan finance thereby banks hesitate to give loans to small scale units evidently as a fairly significant proportion of loans given to small enterprises in the past have compounded the problem of non-performing assets (NPAs)” he said.
He also felt the need to streamline the credit guarantee system which would enable small firms to avail credit for both inception and expansion.
Rawat called for raising awareness among the MSMEs on formal financing options. “There is a need to spread awareness about formal financing opportunities within the MSME sector to grow their credit exposure, limit risks and seek better spreads by developing and implementing sector-specific policies.”
The study suggested a number of measures to ensure efficient credit flow to the MSMEs:
- Banks can implement supplier and dealer financing products thereby managing and controlling credit exposures by working with the MSMEs linked to supply chains of their large corporate customers.
- Banks can also join hands with non-banking finance companies (NBFC) to disburse credit to the sector and the banks could acquire first lien on collections.
- The government should step in to facilitate platforms for market linkages, skills development, technological up gradation and promoting cluster development, enhancing advisory support and growth of venture funds.
- Last but not the least, the government should take strong policy initiatives to develop adequate and quality infrastructure by addressing supply constraints, approval delays and creating enablers.