The MSME sector is one of the highest contributors to the employment rate and GDP of our country. It covers around 95% of the industrial units and approximately half of the total exports.
As a significant employment generator, the MSME sector employs more than 11 crore people. In recent news, the Government of India sanctioned ten thousand crores as a capital infusion to boost the business ecosystem for new enterprises.
Clearly, the MSME is growing rapidly with the government schemes and subsidized MSME loans. Banks, loan distributors, and NBFCs provide lucrative offers on business loans, supported by the apex bank of India, RBI.
Though the ecosystem seems favorable for MSME from all corners, there are certain challenges to getting the final approval and credit of the amount for business purposes. Here are five thought-provoking facts that detail some of the most significant obstacles surrounding MSME loans.
Five mind-numbing facts about MSME business loans
Preference for big corporates and businesses
The government has launched several schemes for subsidized MSME loans, such as the Prime Minister Mudra Yojana, Prime Minister Employment Generator Programme, Stand-up and Start-up India, etc. Banks and other lenders are supposed to provide collateral-free business loans on easy terms for all eligible applicants.
But the devil lies in the details. Practically most lenders do not prefer to provide business loans to small businesses. They delay the process if the borrower is financially weak, and repayment could be a problem during the loan tenure.
Instead, lenders prefer big corporate houses and established businesses for their sufficient financial backup and repayment capacity. Large enterprises assure the security of the fund and on-time EMIs. They seem reliable in comparison with MSME enterprises.
The problem is multi-faceted: government pressure to lend them money, rising NPA, and several loan defaulters who think a loan is a gift from the ‘sarkar’.
The gap between demand and supply for MSME loans
The Government of India is trying its best to institutionalize financial funding for the MSME sector. But on the ground, there is a visible gap between the supply of the loan and demand for the financial support.
MSME covers village units, tiny units, and khadi units, among others. Thousands are in the interior of the country, and/or they are not aware of different subsidies and schemes. Hence, they miss out on the benefits of government initiatives.
Additionally, due to their dire financial situation, lenders do not show much enthusiasm to provide them with financial support. This mismatch between demand and supply is stark if you visit villages of India, far from the madding crowd.
Loan distributors, banks, and NBFCs need to show a little more responsibility towards economic reforms. Furthermore, people should be more responsible towards MSME loan repayment. The problem is cyclical, and the solution can not come only from one end.
For reference: Gross Non-performing Assets related to MSME and retail loan books of Public Sector banks have risen to 7.28% in June 2021 from 6% in 2020.
Lenders play safe
Rising Non-performing Assets is a significant cause for concern for public sector banks. The reasons are loan defaults, delay in payment, and subsidy through several government-initiated schemes for the MSME sector.
In 2021, the central government had taken a few significant steps to manage burgeoning NPA. Nirmala Sitharaman, the Finance Minister of India, had announced an asset reconstruction company and asset management company to clean up NPA in the banking sector caused by the MSME sector.
Lenders are already under extreme pressure from NPAs and do not want to pile up further. They prefer established enterprises instead of lending to micro, small and medium businesses.
The government needs to clean up NPA systematically. It will encourage banks and other lenders to provide financial support for the MSME sector. Banks, NBFCs, and loan distributors cannot keep lending with the rising pile of NPAs.
Collateral for MSME loans
Almost all government schemes provide collateral-free MSME business loans. It increases the risk of defaults and delays in repayment. Lenders prefer loans against property for disbursing MSME business loans because they can redeem their funds in case of loan default.
Reports say that most MSME loans are sanctioned against property, jewelry, precious metals, fixed deposits, etc. Lenders need the security of their funds, and the government should provide more practical security options to encourage collateral-free business loan disbursal.
Inadequate record management by MSMEs
A credit score is one of the crucial determining factors for loan disbursal. All banks, loan distributors, and NBFCs prefer a good credit score to process MSME business loans. Here comes the problem: most MSMEs have poor or no credit history. Government bodies have not maintained systematic credit data either.
Inadequate records deter lenders the most when it comes to trusting MSME loan borrowers. Financial experts always advocate the credit scoring model to bring transparency and ease to loan processing for lenders.
The government is taking necessary steps to bridge the mismatch due to the lack of proper credit records. A system with clear financial history and transactions will help lenders to process loan applications smoothly. The MSME sector will get loans on easy terms with trust in the borrowers.
Concluding thoughts
These five challenges are the main practical issues that come in between the implementation of government schemes for easier MSME loan disbursal. The government is taking all the required steps to minimize NPA, build trust in borrowers, improve the lending capacity of lenders, and build credit score data. With the collaborative work of the government, lenders, and responsible MSME business owners, these challenges can be sorted out and create a vibrant, conducive atmosphere for a thriving MSME base in India.
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