To thrive in today’s rapidly evolving business environment, MSMEs must foster innovation through research and development (R&D). Unfortunately, limited financial resources often hinder their ability to invest in R&D activities.
Credit access to MSMEs: In today’s rapidly evolving business landscape, micro, small, and medium-sized enterprises (MSMEs) face numerous challenges that hinder their growth and profitability. However, a significant opportunity lies before them— as a result of a recent surge in access to credit. The RBI recently announced an increase in credit to MSMEs by 14.4% (YoY) in their FY23 annual report.
The government’s proactive measures to ease access to credit for MSMEs are highly commendable and have had a significant impact on fostering their growth. The implementation of priority sector lending guidelines by the Reserve Bank of India (RBI) ensures that bank loans extended to MSMEs qualify for classification under priority sector lending, enabling easier access to credit. Additionally, the mandate for scheduled commercial banks to not require collateral security for loans up to Rs 10 lakh to MSE sector units has further facilitated credit availability.
The introduction of the Trade Receivables Discounting System (TReDS) has been instrumental in addressing the issue of delayed payments to MSMEs by providing a platform for financing trade receivables from various buyers. Furthermore, the special frameworks introduced since 2019, including restructuring windows, have allowed banks to address the stress faced by MSMEs and provide them with the necessary support during challenging times. These measures showcase the government’s commitment to empowering MSMEs and fostering their financial well-being, ultimately driving their operational efficiency and contributing to overall economic growth.
This newfound access to capital has the potential to revolutionise the way MSMEs operate by enabling them to invest in modern technologies, maintain optimum inventory levels and cash flows, optimise processes through automation, and foster innovation through research and development (R&D). It truly has the potential to enhance operational efficiency and unlock potential.
Investment in Modern Technologies
With greater access to credit, MSMEs can now bridge the financial gap that often prevents them from investing in modern technologies. Embracing technology is crucial in today’s hyperconnected world, as it enables businesses to streamline operations, enhance productivity, and reduce costs. By leveraging credit to upgrade their infrastructure, acquire cutting-edge software and machinery, and implement efficient digital systems, MSMEs can optimise their manufacturing processes, automate repetitive tasks, and minimise human error. This, in turn, leads to higher productivity, improved quality control, and enhanced customer satisfaction.
The digitalisation of MSMEs helps them create new business opportunities and revenue streams, acquire new customer segments, and improve operational efficiency and employee productivity. Emerging tech-based platforms are now helping MSMEs upscale and integrate their operational capabilities. Most tech-based platforms specialise in various domains, helping them cater to various facets of MSME operations such as planning supply chain & logistics, channelising workflow among interlinked departments and monitoring product quality.
Maintaining Optimum Inventory Levels and Cash Flows
MSMEs often struggle to strike a balance between maintaining optimum inventory levels and managing cash flows effectively. Access to credit empowers these businesses to address this challenge head-on. By leveraging credit to procure raw materials, invest in inventory management systems, and adopt just-in-time (JIT) practices, MSMEs can achieve greater control over their inventory levels. This not only reduces the cost associated with excess inventory but also ensures the availability of materials when needed, thus improving customer responsiveness. Moreover, by strategically managing their cash flows through credit facilities, MSMEs can optimise working capital, seize growth opportunities, and navigate through economic uncertainties more effectively.
Optimising Processes and Automation
Operational inefficiencies can be a significant roadblock for MSMEs striving for growth. Access to credit provides MSMEs with the means to optimise their processes and embrace automation. By investing in business process reengineering, adopting lean methodologies, and implementing robotic process automation (RPA), these businesses can eliminate bottlenecks, reduce waste, and enhance operational efficiency. Automating repetitive tasks not only saves time and labour costs but also minimises errors and improves overall process accuracy. This streamlined approach allows MSMEs to focus on core competencies, improve service delivery, and gain a competitive edge in the market.
Investment in Research and Development
To thrive in today’s rapidly evolving business environment, MSMEs must foster innovation through research and development (R&D). Unfortunately, limited financial resources often hinder their ability to invest in R&D activities. Increased access to credit can change this narrative. By securing funds for R&D initiatives, MSMEs can explore new market opportunities, develop innovative products and services, and enhance their competitive positioning. R&D investments facilitate technology adoption, encourage creativity, and enable MSMEs to stay ahead of market trends, thus fostering sustainable growth and long-term success.
Access to credit has emerged as a game-changer for Indian MSMEs, empowering them to enhance operational efficiency and unlock their true potential. By strategically utilising credit, MSMEs can invest in modern technologies, maintain optimum inventory levels and cash flows, optimise processes through automation, and fuel innovation through R&D. As these businesses embrace these transformative practices, they become more agile, competitive, and resilient in the face of evolving market dynamics. It is imperative for policymakers, financial institutions, and MSMEs themselves to collaborate and capitalise on the opportunities presented by increased credit access. By doing so, we can pave the way for a thriving MSME sector that drives economic growth and fosters a culture of innovation.
Jayanth Murthy is the Joint Managing Director, South Asia & Africa at Kaizen Institute. Views expressed are the author’s own.