Credit and Finance for MSMEs: Even as the credit gap in the Micro, Small and Medium Enterprise (MSME) sector in India remains enormous, there is no official study undertaken by the central government to estimate the current credit gap. In a written reply to a question on the MSME credit gap in Rajya Sabha on Monday, MSME Minister Narayan Rane said the government has not undertaken any specific study to estimate the current credit gap in the MSME sector.
Credit gap is essentially the difference between the total supply of credit from formal channels in the country vis-a-vis the addressable demand.
The latest available data on the credit gap in the MSME sector is of 2018. According to two separate reports, one by International Finance Corporation in November 2018, the addressable credit gap in the MSME sector is estimated to be Rs 25.8 trillion (Rs 25.8 lakh crore) or $345 billion as per the current currency exchange rate. The second report in June 2019 by the UK Sinha Committee constituted by the Reserve Bank of India (RBI) had noted that the overall credit gap in the MSME sector is estimated to be Rs 20-25 trillion (Rs 20-25 lakh crore) or $267-334 billion.
“Government has taken a series of measures to close the credit gap. The most important of these measures is to bring the MSMEs operating in the informal and unorganised sector under the ambit of formal lending through registration under Udyam Portal. This registration helps MSMEs in availing the benefits of schemes of Ministry of MSMEs and Priority Sector Lending (PSL) from banks,” Rane said in his reply.
Revised Priority Sector Lending guidelines by RBI to include retail and wholesale in MSME definition, TReDS to facilitate the financing of trade receivables of MSMEs from corporate and PSUs, co-lending by banks and NBFCs to priority sector, and Credit Guarantee Scheme for Micro and Small Enterprises (CGTMSE) without hassles of collateral and third-party guarantee were other measures according to the minister that the government had taken towards filling the credit gap.
Also read: Govt further extends Udyog Aadhaar validity; MSMEs now have time till March-end to move to Udyam portal
“One thing to be done to help fill the credit gap is getting these angel investors, venture capital and private equity investors into the manufacturing system. It is not that MSMEs are not bankable businesses, it is that they are not exposed to the right kind of people who know how to take risks with their money. Neither investors look at them as they look at technology businesses with high growth multiple. Also, MSMEs must make internet adoption one of their top priorities,” Yogesh Pawar, Founder Association of Rising & Inspiring Syndicate of Entrepreneurs (ARISE) told Financial Express Online.
Importantly, the current share of bank credit to MSMEs (Rs 15.30 lakh crore) in the total gross bank credit (Rs 116.83 lakh crore) as of December 2021 was only 13 per cent as a number of MSMEs continue to rely on informal sources of credit such as moneylenders.
Moreover, “the credit gap has significantly increased in the past 5 years,” the UK-headquartered global professional accounting body Association of Chartered Certified Accountants (ACCA) had said in its report in June last year. Moreover, to date, only 16 per cent of MSMEs had received financing from formal financial institutions, while the rest around 80 per cent struggling to access capital from traditional lending channels.
“Challenges are manifold, from increasingly risk-averse, traditional lending channels to lack of easy access to capital, from lack of awareness among small businesses about available finance products to high operating costs and more,” the report had noted.
“With demonetisation, the introduction of GST, the credit quality or quality of the borrower has declined significantly in the last three-four years. Lenders are also very particular with regard to the quality of credit. Now, they reconcile turnovers with GST data unlike earlier when there was no such mechanism. I think the onus to bridge the credit gap lies on both sides. Borrowers have to comply with the compliance regime and upgrade their systems while lenders will also have to look at the purpose for which money is required instead of having a minuscule way of looking at the data,” Kalyan Jagnani, Senior Partner at digital learning and consulting platform for entrepreneurs School of Inspirational Leadership told Financial Express Online.
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On the other hand, there is no updated data on the number of MSMEs in the country as well. The latest information dates back to the National Sample Survey’s (NSS) 73rd round conducted by National Sample Survey Office, Ministry of Statistics & Programme Implementation during 2015-16.
As of FY16, there were 633.88 lakh (6.33 crore) unincorporated MSMEs in India, of which 196.65 lakh were in manufacturing, 230.35 lakh were into trade, 206.85 lakh were into other services, etc. Importantly, out of total MSMEs in the country currently, only 1.02 crore were registered MSMEs under Udyog Aadhaar Memorandum till June 2020.
