According to a study, there is an urgent need to provide low-cost finance to micro, small and medium enterprises (MSMEs) that have limited working capital and are dependent on PSU banks, reports media.
MSMEs have a high demand for finance but a large part of which is not met, particularly debt, to finance their growth, said a report which was jointly prepared by Resurgent India and industry chamber CII.
"The present domestic market conditions do not provide enough opportunities for the sector for raising low cost funds. Therefore to improve this flow, there is a need to provide low cost finance to the units which have limited working capital and is dependent exclusively on finance from public sector banks," it said.
The cost of credit in the Indian MSME sector is higher than its international peers.
At present, banks charge over 15 percent interest on loans given to MSMEs in the country, while their counterparts in other countries can avail loans at 5-7 percent.
Further, the report said the most dominant factor affecting the growth of MSME sector has been access to loan finance, adequately and timely.
"This problem is persistent despite clear instructions from the Reserve Bank of India and the Ministry of Finance to encourage flow of funds from the commercial banks to small enterprises," it said.
"It is observed that there are strong structural underpinnings to the inadequate flow: the organisational structure of banks and processes within them have taken them far from task orientation and have created a specific bias against small loan portfolios," it said.
Besides, the ways of direction and supervision of banks by RBI and an absence of performance-based incentive system for proactive bankers have all constricted easy flow of loan finance to small firms, it added.
The Prime Minister's Task Force on MSMEs had recommended 20 percent year-on-year growth in credit to MSEs to ensure enhanced credit flow. However, most of these units still face problems in getting easy access to finance.
Further, the report observed that there is a need for a transparent credit rating system, simplification/reduction in documentation for accessing finance and providing interest rate subvention to the sector must be taken into consideration in order to maintain the growth of the industry.
The sector has been witnessing a slow growth with its share of exports falling from 40 percent to 36 percent.
The sector contributes over 8 percent to the country's Gross Domestic Product (GDP) and accounts for 45 percent of the manufacturing sector. There are around 3.6 crore such enterprises, employing over 8 crore people.