MSMEs face a credit gap of $530 billion, and only 14% of the 63 million small businesses in India have access to credit, according to a report by investment bank Avendus Capital. This issue needs to be addressed especially as MSMEs are considered a major plank of India’s economic growth with contribution of 30% to GDP, 48% to exports and the second largest employer after agriculture.
Experts say the government should announce ways to reduce the credit gap in the Budget and make the sector more self-reliant.
Monu Jain, Partner, Aavishkaar Capital, says the sector is forced to access credit from informal sources with high interest rates and adverse unsustainable terms. “The government has been cognisant of this aspect and have come up with multiple policy support mechanisms, but much more needs to be done. It is expected that the budget will have a specific funding pool for MSMEs — an outlay of over 10,000 crore — for financing support. MSMEs also need greater access to bank loans which are collateral-free and more aligned with a cash flow assessment. The current guarantee schemes must be rationalised and made more effective to provide incentives to financial institutions for this lending,” she says.
From the policy perspective, Jain is of the view that promotion of export credit guarantee schemes by way of an incentive package can help improve working capital availability for MSMEs. “Increase in export subvention rates is required from 3% to at least 5% given the increase in interest rates in the last few years. Due to volatility in global situations, there is a need to provide them with relaxation in repayment terms beyond 90 days, to avoid being categorised as defaulters. A special dedicated fund for MSME export capacity creation and development would help MSME exporters tide over multiple issues,” she adds.Industry experts highlight the pressing need to tackle the issue of cash flow problems for the sector, in the upcoming budget on July 23.
Winny Patro, CEO and Co-Founder of Recordent India, a credit and payment reporting fintech platform, says MSMEs are caught in a vicious cycle of cash flow issues. “An SME entrepreneur spends more time dealing with late payments than growing his business. There is a need to address the problem holistically, the way the banking industry got better with timely payments due to credit bureaus. MSME data stack could be one of the solutions to reduce credit risk and avoid late payments. In addition to this, benchmarking payment terms based on sectors and nature of products/services could be another solution. Hoping that the upcoming budget gives importance to solve this massive problem of Rs 10 lakh crore late payments stuck in the MSME sector in India,” he says.
MSMEs are also rooting for indirect financing in order to bridge the funding gap. “We expect an increased allocation for the Fund of Funds for Startups to Rs 15,000 crore, which may benefit innovative MSMEs indirectly,” says Hariom Seth, Founder of tech marketing firm Tagglabs.
Seth points out that the budget should also address the creditworthiness of the MSME workforce through implementation of skill development initiatives with an allocation of Rs 10,000 crore for PM Kaushal Vikas Yojana 4.0 or similar schemes. “We look forward to the days when alternative credit assessment models would be introduced to substantially reduce the high rate of rejection of loan applications. A ‘One Nation, One KYC’ system will give an impetus to the loan application process. Government-backed credit guarantee schemes for first-time borrowers can be hugely beneficial to the ecosystem,” he adds.
