Key Challenges MSMEs Face in India

Source: The post key challenges MSMEs face in India has been created, based on the article “Close the credit gap MSMEs face to create jobs and drive growth” published in “Live Mints” on 13th August 2024

UPSC Syllabus Topic: GS Paper 3-Economy- Industries (MSMEs)

Context: The article discusses how India’s MSMEs could grow if their credit gap is reduced. It highlights challenges in lending and suggests using digital tools, better data, and government programs to responsibly increase credit access and support MSME growth.

For detailed information on MSMEs: Significance, Challenges and Solutions read this article here

What is the Importance of MSMEs in India?

1. India has 60 million Micro, Small, and Medium Enterprises (MSMEs).
2. They employ over 110 million people.
3. MSMEs contribute nearly 30% to India’s GDP.
4. They account for about 50% of the country’s exports.

What are the Key Challenges MSMEs Face in Accessing Credit?

1. Large Credit Gap: MSMEs in India face a persistent credit gap of over 60%, limiting their growth potential.
2. Limited Data for Credit Assessment: Financial institutions often rely on limited data sources, missing out on seasonal and real-time cash flow information that can better assess a borrower’s creditworthiness.
3. Cumbersome Processes: Documentation collection and customer management processes are often complex and costly, discouraging formal borrowing.
4. Reliance on Informal Credit: Over half of MSMEs turn to informal and expensive credit sources due to the lack of access to formal funding.
5. Inadequate Loan Products: Even qualifying MSMEs often receive loans that do not match their sector-specific cash flow cycles, such as in dairy, food processing, or construction, leading to financial strain.

What Initiatives are Helping Bridge the Credit Gap?

1. Digital India Initiatives: Tools like FASTag, Digilocker, GeM, and ONDC provide granular, real-time data, helping lenders access high-quality customer information, improving credit assessments.
2. Account Aggregator System: Facilitates consent-based data exchange, speeding up banking processes and providing more accurate data for credit decisions.
3. 2024 Union Budget Measures:
4. a) Credit Guarantee Scheme: Provides collateral-free liquidity for manufacturing MSMEs, reducing reliance on informal credit.
5. b) ‘Tarun’ Mudra Loan Limit Increase: The loan limit doubled from ₹10 lakh to ₹20 lakh, aiding MSMEs in scaling operations.
6. c) TreDS Platform Expansion: Lowered turnover threshold from ₹500 crore to ₹250 crore, increasing participation and access to formal credit for smaller MSMEs.

What Impact Could These Measures Have?

1. Increase frontline productivity by 20-25%, allowing more efficient business growth.
2. Reduce credit risk by 15-20%, making lending safer and more reliable.
3. Double auto-renewal rates, leading to more consistent loan renewals.
4. Improve turnaround times by 50%, enabling quicker loan processing.
5. Double growth in transaction value through supply-chain solutions, helping MSMEs manage cash flow better.
6. These improvements help avoid typical boom-bust cycles in lending, creating sustainable growth.
7. Financial institutions can help deserving MSMEs access the credit needed to drive economic growth and job creation.

Question for practice:

Discuss the challenges faced by MSMEs in accessing credit in India and the initiatives being implemented to bridge the credit gap.