Credit gap still cripples Indian MSMEs despite govt schemes

MSMEs in India face a significant credit gap, with a demand of Rs 69.3 trillion and availability of only Rs 10.9 trillion. This makes it difficult for them to grow and flourish

The three major pillars that support the growth of MSMEs shall continue to be cheaper, faster, and larger credit; digital marketing; and seamless incorporation of technology and innovation on a continuing basis. The need to bring in transparency in their dealings both by the regulatory machinery and by the entrepreneur shall be another imperative. Of all these three, availability of credit still appears to be the biggest challenge.

According to a recent report on the MSME credit ecosystem, published by 1Lattice, a tech-enabled consultancy firm, the credit gap to MSMEs is of the order of Rs 33 Trillion. According to a IFC report, availability of credit to Indian MSMEs is only INR 10.9 trillion or roughly 165 billion US dollars, whereas the demand is of the order of 69.3 trillion INR. This makes the credit gap almost 85 per cent of the demand. 70 per cent of this demand is only for filling the working capital needs. If one considers the micro businesses and enterprises alone the credit gap escalates to the tune of 95 per cent.

Making allowance for even sizable exaggeration, such unavailability of credit is both appalling and alarming. One wonders how does this sector survives, sustains and flourishes in India?

That MSMEs, particularly small and micro enterprises have continuing problem for raising institutional credit is well recognised and has prompted government to devise specific schemes to ease the challenge. One such initiative was launching of MUDRA.

Prime Minister Mudra Yojna - PMMY

Launched by the Prime Minister on April 8, 2015, MUDRA stands for Micro-Units Development and Refinance Agency. Under this scheme, borrowers can avail business loans ranging from Rs 50,000 to Rs 10 lakh on the basis of the Sishu, Kishor, and Tarun categories. It envisages providing loan, up to Rs 10 lakh, to income generating micro enterprises engaged in manufacturing, trading and services sectors.

MUDRA loans are extended by banks, NBFCs, MFIs and other eligible financial intermediaries as notified by MUDRA Ltd.

Relying on NSSO Survey (2013), the official statistics estimate the number of small/micro units to be around 5.7 crores, engaging around 12 crore people, mostly individual proprietorship and/or Own Account Enterprises. Over 60 per cent of units are owned by persons belonging to Scheduled Caste, Scheduled Tribe or Other Backward Classes. Most of these units are outside the formal banking system, and hence are forced to borrow from informal sources or use their limited owned funds, both the sources being expensive and uncertain.

MUDRA Loan Scheme was proposed to bridge this gap, to encourage first generation entrepreneurs, and to help existing small businesses to expand their activities.

The Scheme diluted many of the requirements of raising funds from the Banks and NBFCs. RBI mandated the Banks not to demand collateral security in respect of loans up to Rs. 10 lakh. Banks were also asked to avail of the Credit Guarantee Scheme cover, wherever necessary.

This flagship scheme brought a freshness of approach and resulted in larger demand on the financial institutions, a welcome transformation from the earlier perception of such institutions both unreachable and indifferent. Resultantly, there was a substantial growth in the quantum flowing to small businesses. According to MUDRA, the small business loans under the Pradhan Mantri Mudra Yojana (PMMY), the sanctioned amount as on December 2022 was Rs 2.58-lakh crore out of which loans worth Rs 2.51-lakh crore have been disbursed, supposedly a record. The last financial year, loans worth Rs 3.31-lakh crore were disbursed under PMMY against a sanctioned amount of Rs 3.39-lakh crore. This does not include the traditional institutional finance available to them.

This, by any account, is encouraging. And yet it has only brought about marginal difference, given that the credit deficit is of the tune of INR 3 Trillion. Over 80 per cent of the credit requirements remains unmet.

The Persistent Credit Gap

The availability of formal credit remains a daunting challenge for the majority of Indian MSMEs. The following issues continue to plague the institutional environment.

Regulatory Barriers and Credit Assessment: Traditional lenders often demand extensive documentation and credit histories, posing significant hurdles for micro-enterprises. The emphasis on past credit records excludes many MSMEs from the formal credit ecosystem. Additionally, the lack of understanding of digital lending further compounds the problem, highlighting the need for regulatory reforms and increased financial literacy.

Government Initiatives and Financial Inclusion: While the government has introduced various schemes to enhance credit access, the impact remains limited. Budget allocations and interest subventions aim to alleviate the credit crunch, but awareness among MSMEs about these opportunities remains low. Bridging this information gap is crucial to ensuring effective utilization of government initiatives.

Role of Fintech and Alternative Lending Models: Fintech solutions offer a ray of hope for MSMEs, leveraging technology to assess creditworthiness and provide innovative financing options. Alternative lending models, such as peer-to-peer lending and cluster financing, address specific needs of MSMEs, filling the gaps left by traditional banks. However, widespread adoption and regulatory support are essential for their scalability.

The Impact of External Factors: The challenges faced by MSMEs get exacerbated due to factors like Covid-19 epidemic, when the conventional approaches are either absent or inadequate. Such eventualities can recur. Addressing these external shocks requires a coordinated effort from all stakeholders.

The MSME sector's growth is intertwined with its access to credit, making it imperative to address the existing challenges comprehensively. Regulatory reforms, technological innovations, and greater financial inclusion are key to unlocking the potential of Indian MSMEs. By bridging the credit gap, India can unleash the full economic potential of its vibrant entrepreneurial landscape.

Transparency and attitudinal reform

MSMEs can effectively and substantially increase the credit access by embracing formalisation. The evolving digital ecosystem will improve transparency and minimise malpractices unlocking their full growth potential, enhance competitiveness, and contribute effectively to economic development. Another legitimate though intangible expectation merits an overwhelming consideration. And this is the attitude of lending institutions. They have to be more sensitive and appreciative of Small Business’s needs, a mind-set that empathises and not discriminates. Credit institutions must look at them and look after them as they would do to big industries. The sector deserves and must receive a ‘Balanced Banking Relationship’.

(The author is the former MSME secretary, Govt of India.)