Wednesday, 8 February 2012

Access to Finance : Major Concern for MSMEs

The crucial role and place of the MSME sector in the Indian economy is well established now. These enterprises not only provide employment to a large number of unskilled and semi-skilled people but also support bigger industries by supplying raw material, basic goods, finished parts and components, etc.

There are about 2.6 crore enterprises in this sector. The sector accounts for 45 % of the manufactured output and 8%  of the GDP. MSMEs contributed close to 40 % of all exports from the country and employ nearly 6 crore people which is next only to the agricultural sector. MSME is the best vehicle for inclusive growth, to create local demand and consumption.

The Government of India had taken a right step by enacting the MSMED Act, 2006. Advances extended to the MSE sector are treated as priority sector advances and as per the RBI guidelines, banks are required to extend at least 60% of their advances to the MSE sector to Micro Enterprises.

However, the statistics available says different, as according to the Fourth Census of MSME sector (September 2009), only 5.18 percent of the units had availed of finance through institutional sources while 2.05 percent of them had finance from non-institutional sources and the majority of units (92.77 percent) had no finance or depended on self-finance. Considering this extent of financial exclusion in the sector, the problem of unavailability of finance is overshadowing the issue of high cost of credit. The state has a strong base of MSMEs of around 31lacs, but overall position  is  not different as at national level.

While lending to MSMEs, specially to MSEs,  there is too much distrust in their relationship with the banks/Financial Institutions (FIs). There is need to change the role of banks/FIs from money lenders to business partners .They should start providing advisory and planning services actively, and their staff should be  trained to help MSMEs in diverse areas including marketing, technology and market access.

The government should also focus on establishing mechanisms to improve the credit information infrastructure, strengthen creditors' rights, speed up payment by corporate, avail more alternative sources of capital, and ensure timely identification and prevention of sickness in MSMEs .  

Such an approach will help not only the small firms seeking loans, but also the bankers/financial institutions in risk assessment and risk management. However, it is true that there shall be successes and failures, but despite the risk, financing of first time entrepreneurs is must for financial inclusion and growth of all.The state financial corporation’s/state level institutions may play a vital role and they may be given/ may share responsibilities in this regard jointly with banks.   

The interest rate hike cycle has already taken a toll on the economy with high cost of credit intensifying the strains on the industry and needless to mention here, it's the MSEs who have suffered the most. In this scenario, the reduction of CRR by 0.5% by the RBI, after third quarter review of monetary policy-2011-12, is really something that has got the hopes up, as this will enable   the banks to have excess fund of around Rs.32000 crores for lending.

However, only the availability of sufficient funds with banks is not the solution of the finance concern of the MSMEs. Unless the sector is arranged lower cost credit, finance availability only will not ease the sector. As such the government /RBI should now ensure availability of adequate finance for MSMEs and on other hand, move towards in the direction of reducing interest rates for industries, specially, for MSME sector.    

R.B. Verma

1 comment:

  1. The survey revealed only 27 per cent were confident that they could take in their stride the tightening cash flow that resulted from one of these events.

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