Financing Challenges of MSMEs in India

Source-This post on Financing Challenges of MSMEs in India has been created based on the article “In the works – MSMEs get a helping hand in the Budget but their challenges in financing remain” published in “Business Standard” on 29 July 2024.

UPSC Syllabus-GS Paper-3- Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Context-The article discusses recent measures introduced in the Union Budget for Micro, Small, and Medium Enterprises (MSMEs) in India. It highlights the difficulties in implementing these measures, especially with invoice discounting and credit access.

The Global Alliance for Mass Entrepreneurship (2023) stressed that MSMEs are crucial for economic growth and job creation for the 90 million workers expected by 2030. In FY22, MSMEs contributed 35.4% to India’s manufacturing output, and in FY24, they accounted for 45.7% of exports of MSME-specified products.

What are the recent measures introduced in the Union Budget for Micro, Small, and Medium Enterprises (MSMEs)?

1) Trade Receivables Discounting System (TReDS)– The turnover limit for buyers on TReDS has been reduced from ₹500 crore to ₹250 crore. This will lead to the inclusion of 22 more central public sector enterprises and 7,000 additional companies.

2) Credit Access for MSMEs- Banks are urged to support MSMEs, including those with special mention accounts. This is supported by government-backed fund guarantee.

What are the financing challenges faced by the MSMEs in India?

1) Trade Receivables Discounting System (TReDS)-

A) A persistent issue is large firms delaying bill settlements to MSMEs.

B) MSMEs generally avoid filing complaints or legal actions against large buyers to enforce contracts.

C) The June 2024 Financial Stability Report reveals that invoices financed on TReDS grew by over 56% in 2022-23, with a 94% success rate. However, only 82,000 MSMEs are registered on TReDS out of 46.9 million firms on the Udyam portal.

2) Credit Issues-

A) Bankers are concerned about conflicts with RBI staff and the risk of loans failing.

B) The high credit-deposit ratio (nearly 80%) may limit banks’ ability to meet MSME needs.

C) Upcoming changes to the RBI’s liquidity coverage ratio could affect credit growth plans.

3) Credit Demand: –CRISIL Ratings (June 2023) estimates the MSME sector needs over ₹100 trillion in debt, mainly for working capital. However, only 25% of this is obtained through formal channels, while informal sources charge high interest rates.

4) Working Capital Issues-

A) Limited information and infrequent data make it difficult to assess MSME working capital needs.

B) High inventory-turnover ratios and limited creditor capacity make the problem worse.

5) Regulatory Issues– Building regulations hinder efforts to expand manufacturing capacity.

A detailed article on MSMEs: Significance, Challenges and Solutions can be read here.

6) Technology and Awareness- Building robust technological infrastructure and enhancing customer awareness are major challenges in implementing MSME-focused initiatives.

Question for practice

What new measures for Micro, Small, and Medium Enterprises (MSMEs) were introduced in the recent Union Budget? What financing challenges do MSMEs in India face?