{"id":274314,"date":"2023-12-18T20:13:07","date_gmt":"2023-12-18T14:43:07","guid":{"rendered":"https:\/\/forumias.com\/blog\/?p=274314"},"modified":"2023-12-18T20:13:07","modified_gmt":"2023-12-18T14:43:07","slug":"social-capital-challenges-faced-by-msmes-in-accessing-finances-we-must-bank-on-social-capital","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/social-capital-challenges-faced-by-msmes-in-accessing-finances-we-must-bank-on-social-capital\/","title":{"rendered":"Social Capital Challenges faced by MSMEs in Accessing finances – We must bank on social capital"},"content":{"rendered":"

Source: <\/strong>The post Social Capital Challenges faced by MSMEs in Accessing finances<\/strong> has been created based on the article\u00a0\u201cWe must bank on social capital<\/strong>\u201d<\/strong>\u00a0published in\u00a0\u201cBusiness Standard<\/strong>\u201d\u00a0on 18th<\/sup> December 2023.<\/p>\n

Syllabus Topic: <\/strong>GS Paper 3, Indian Economy, Industries and Industrial policies<\/p>\n

News<\/strong>: The article provides historical context to the present finance challenges faced by the Indian entrepreneurs and MSME (Micro, Small & Medium Enterprises) sector.<\/p>\n

What is social capital? <\/strong><\/h2>\n

“Social capital” is defined as the capital or resources we gain from staying within a social network. <\/strong>It includes networks of relationships among people who live and work in a particular society, enabling that society to function effectively.<\/p>\n

What hindered industrial development before independence?<\/strong><\/h2>\n

Mahadev Govind Ranade mentioned in his 1890 speech<\/strong> at the first Industrial Conference in Pune about the scarcity of capital for industry in India due to the hoarding of bullion and the absence of financial institutions.<\/p>\n

Ranade pointed out that there is a locking up of capital in unproductive assets like gold and land due to a lack of institutional arrangements for industrial finance. It hindered industrial development at that time.<\/p>\n

Reason: <\/strong>One of the reasons behind this was social capital constraints<\/strong> arising from hyper-diversity, where capital stayed within caste-community groups. A caste-community only invested in their own community people. The excess finances were invested in unproductive assets, like land and gold. Other well-known reason is lack of development of financial institutions by Britis<\/strong>h.<\/p>\n

In comparison, during Meiji era, Japan<\/strong> was successful in gathering small savings and channeling them into the mainstream of the national economy, which greatly facilitated its industrialization process.<\/p>\n

What are the present challenges of access to finances for MSMEs?<\/strong><\/h2>\n

A century later, historian Dietmar Rothermund <\/strong>also noted the absence of financial institutions in 19th-century India. It is in contrast with Japan’s successful channeling of small savings into national economic development.<\/p>\n

First,<\/strong> a substantial credit gap exists in the MSME sector<\/strong>. Estimates suggest that only a small fraction of enterprises have access to formal credit, with the majority relying on informal sources. As per Avendus Capital the MSME credit gap is estimated at around $530billion. Only 14% of 64 million enterprises have access to formal credit.<\/p>\n

Second<\/strong>, over 99% of the MSME sector comprises micro-enterprises, around 80% of which borrow from informal sources<\/strong>, like friends and family.<\/p>\n

Third, <\/strong>Trust within one’s community continues to play a pivotal role in investment decisions, especially in informal sources of investment.<\/p>\n

Fourth, Public sector financial institutions <\/strong>have somewhat reduced caste bias in capital allocation, particularly in agricultural loans. However, disparities remain in business loans, indicating that social capital and community networks still influence financial decisions.<\/p>\n

Fifth<\/strong>, as per some studies, an entrepreneur from a non-dominant group will find it harder to succeed in a new business because she lacks a network.<\/p>\n

What should be done?<\/strong><\/h2>\n

Caste-based identity politics<\/strong> can further entrench these divisions, strengthening within-community bonds while weakening inter-community financial cooperation. Therefore, it should be avoided.<\/p>\n

Open Credit Enablement Network (OCEN<\/strong>) can function as a potential technological solution. Its aim is to transcend caste and community biases, enabling a more equitable distribution of business credit across India. This aligns with Ranade’s vision of a financially inclusive and industrially robust India.<\/p>\n","protected":false},"excerpt":{"rendered":"

Source: The post Social Capital Challenges faced by MSMEs in Accessing finances has been created based on the article\u00a0\u201cWe must bank on social capital\u201d\u00a0published in\u00a0\u201cBusiness Standard\u201d\u00a0on 18th December 2023. Syllabus Topic: GS Paper 3, Indian Economy, Industries and Industrial policies News: The article provides historical context to the present finance challenges faced by the Indian… Continue reading Social Capital Challenges faced by MSMEs in Accessing finances – We must bank on social capital<\/span><\/a><\/p>\n","protected":false},"author":10320,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[1230,167,9],"tags":[10503,216,8184],"class_list":["post-274314","post","type-post","status-publish","format-standard","hentry","category-9-pm-daily-articles","category-economy-subject","category-public","tag-business-standard","tag-gs-paper-3","tag-indian-economy","entry"],"jetpack_featured_media_url":"","views":{"total":7,"cached_at":"","cached_date":1702925178},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/274314","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/10320"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=274314"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/274314\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=274314"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=274314"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=274314"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}