New Delhi, Oct 7 (KNN) Only 33 per cent of micro, small and medium enterprises (MSMEs) have access to banks and institutional financing channels, while the rest use informal ways to raise finance, a study said.
“Just about 33-34 per cent of firms operating in the MSME sector have an access to banks and institutional financing channels while the rest raise finance through informal financers, friends, family and other such personal channels,” the study titled ‘Indian Banking Industry: Sustaining Growth with Equity,’ jointly conducted by The Associated Chambers of Commerce and Industry of India (ASSOCHAM) and Resurgent India said.
“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),” said secretary general of ASSOCHAM D S Rawat while releasing the study.
“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” highlighted the study.
The current overall debt finance demand of MSME sector is in excess of Rs 32 lakh crore and of this over Rs 6 lakh crore of debt is financed through the formal sector. Besides, public sector banks (PSBs) account for over 70 per cent of debt financing to the MSME sector, while private and foreign banks account for over 20 per cent of credit flow.
“Considering there is a significant scope for flow of banking credit in the MSME sector, the Reserve Bank of India (RBI) had taken certain steps like priority sector lending norms to encourage greater bank led financing but the financing gap has only widened given the massive demand-supply constraints,” Rawat said.
“There is an urgent need to strengthen and streamline the credit guarantee system as in its absence the smaller units would continue to suffer neglect in accessing much needed credit for both inception and expansion.
“There is also the 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,” he added.
Banks need to work with MSMEs linked to supply chains of their large corporate customers and leverage this relationship to manage and control credit exposures as most of the banks have succeeded in implementing supplier and dealer financing products and processes thereby increasing deeper penetration across a large number of corporate clients, highlighted the ASSOCHAM-Resurgent India study.
Another way could be to co-write credit with a trusted non-banking finance company (NBFC) partner, where first lien on collections remains with the bank and this way both partners leverage their respective strengths.
The government should also facilitate platforms for market linkages, skills development, technological up gradation and promoting cluster development, enhancing advisory support and growth of venture funds.
Development of adequate and quality infrastructure is also necessary to maintain growth momentum in the MSME sector. The government needs to take strong policy initiatives in this regard by addressing supply constraints, approval delays and creating enablers for infrastructure growth.