It is well known fact that MSME’s and SME’s contribution to the country’s
GDP is growing every year and this includes Micro, medium and small
scale industries. It also includes industries based in rural areas, agro
based Small Business and Business Financing, and handicrafts based
industries generating huge employment and revenue. Few enterprises in
MSME also form as subsidiary to big manufacturing houses supplying them
with finished goods and raw materials. Over the years the MSME’s have
developed an ecosystem where by the rural and small towns have grown
hand in hand and removing regional imbalances.
The MSME sector also provides strength to other industries by providing
them with raw materials and ancillary products and skilled workers. MSMEs
are organized into small units with minimum capital requirements and
minimal skills
The ever growing MSME sector face many challenges and the key amongst
them is financing their business projects, disbursement of loans, getting bank
collaterals, loan repayment and poor financial literacy.
This also includes having low credit scores and getting high interest rates from
financial schemes. These factors make the MSME enterprise more sceptical in
getting bank financing for projects and loans and MSME’s require more cash for
their day to day operations in form of working capital, leaving them more cash
strapped.
Any delay in payments will halt their production and operations and in certain
cases MSME‘s resort to funding from sources which have high interest rates or
non-banking institutions leading MSME’s sometime cash strapped.
MSME’s Growth Depend on Adequate Financing:
The government’s various scheme for MSME helping for access to funding as
most of the regulatory loopholes still exist in this sector. Many outdated regulatory practices keep the MSMEs from accessing financial assistance on time and these
include procedures for acquiring business licenses, insurance, and conducting tax assessments.
MSMEs in rural areas do not possess the knowledge to use online platforms for
conducting regulatory transactions slowing down growth of small businesses and
Business Financing. Scarcity of funds creates obstacles with timely procurement
of raw materials, accessing new technology and equipment, or even acquiring
skilled labor.
Banks also have less faith in certain areas relating to MSME projects as they
(Banks) are less sceptical about Business Financing their projects or funding
as recovery of loan can get difficult due to lack of financial strength. This also
involves complex documentation, required collaterals etc to be submitted on
time for disbursement of loans timely.
Reducing friction in financing for aspiring & existing entrepreneurs:
It has been observed that MSME’s are supplier to large organizations which reflect
their dependencies on big organizations for payment of dues which may get delayed
in some cases.
In many cases the number of enterprises in MSME sector resort to external Business Financing and avoid direct financing from banks. The process of availing of MSME loans involves complex documentation, the necessity of collateral, strict repayment terms,
and high-interest rates.
Such regulatory requirements make it difficult for small businesses to secure
MSME loans and have a better financial stability. Their success depends on big
enterprises and the credit payment terms are set by them which often makes
MSME cash crunch.
The government schemes CGTMSE encourages first-generation entrepreneurs
to opt for self- employment opportunities by providing them credit guarantee
support for loans
Loans not exceeding Rs. 2 crore (US$ 0.2 million) will be provided without any
collateral or third- party guarantee.
The guarantee under the scheme will be provided:
For micro enterprises, up to 85% of the loan amount not exceeding Rs. 5 lakh
(US$ 6,123)
75% for other enterprises
50% for retail enterprises
Support from the Government & Promises for MSME’s in the Budget of 2023
The Budget 2023 focused creating solution to the persistent issue of delayed
payments faced by micro, small and medium enterprises (MSMEs) in the country.
Sorting most of the issues faced by the MSME’s regarding delayed and timely
payments. The government will now allow expense deduction by the buyers
only when payments are made.
Further a company can claim deduction on an expense only if it has paid the
supplier against that expense.
Earlier the government allowed deduction against an expense that was recognised
as and when revenue got recognised, even though creditors had not been actually
paid.
The Samdhan portal launched in 2017 has not been effective enough to solve
financing issues of the MSME’s. The portal is used mainly to file online application
by the supplier MSE unit against the buyer of goods/services before the concerned
MSEFC of his/her State/UT.
There are many reasons for MSME’s being ineffective as coordination is less
between buyers and sellers and the process is arduous, as it takes nearly two
months for the first hearing, and thereafter two months to settle the dues
between buyer and seller.
Many enterprises in MSME sector don’t file cases against buyers as their bargaining
power is low and they probably don’t want to lose a buyer.
As per the data from National Credit Guarantee Trustee Company (NCGTC) in Dec
2022 the government’s flagship credit support scheme of Rs 5 lakh crore for MSMEs,
the Emergency Credit Line Guarantee Scheme (ECLGS) has sanctioned or issued 1,19,27,348 loans (borrowers) involving Rs 3,60,539 crore .
Further Micro enterprises were sanctioned Rs 84,031 crore in credit as of November
2022 end. On the other hand, medium enterprises had the lowest share. 2.69 lakh
loans amounting to Rs 62,824 crore were sanctioned.
Emerging technologies a boon for MSME in resolving financing issues:
The MSME’s are not left far behind and with adoption of digital technologies all
aspect of MSME’s can be addressed from financing to operations etc.
India has 22.63 Million MSMEs which accounted for 48% of India’s manufacturing
output of more than 13.7 Million metric tonnes.
To remove impending blockages in accessing finance the MSME’s are benefiting by implementing supply chain. The supply chain finance (SCF) solutions will act as a
boon for the MSMEs who are struggling with low profits, growth stagnancy, and high operational costs.
Being a low financing solution, SCF can bridge gap by providing lending institutions
with tools and insight to manage credit risk and expand the scope of financing to
include the large segment of poorly-funded MSMEs.
To fullfill urgent working capital requirements for MSME,easing their payments
SCF can come as a safe player. Automating transactions makes it easier for MSMEs
to track payments and access funds in a matter of hours. With such seamless and
quick funding, MSMEs can easily invest in business expansion, procure new raw
materials, or update their inventories.
The SCF can help MSMEs maintain daily cash requirements by providing monthly
invoice and offer improved liquidity, leading to a boost in their business growth.
Blockchain is another digital technology tool MSMEs can take benefit as they
can have access to Defi or decentralized finance platform Censor Black. This tool
serves and acts to leverage block chain technology to aid the global MSME sector
by providing them access to institutional and secure finance, making the process transparent and risk-free for all stakeholders.
For more information: https://smeventure.com/new-technological-adoption-leads-to-more-sme-flexibility/
Blockchain technology, because of its unique traits and beneficial features, is
suita-ble to overcome most of the challenges which MSMEs are currently facing.
We believe that the extent to which the MSMEs will be willing to adopt this new
innovative tech-nology will depend on various socio-technical factors which revolve
around people (such as availability of skilled labor and education), processes
(such as enterprise strat-egy and market opportunities), and technology (such as technological infrastructure and technological capabilities).
This is because, in the context of supply chain management, the people, processes,
and blockchain technology need to work synergistically for grad-ual adoption in niche
areas and eventual scaling and deployment on a large scalBlockchain technology,
because of its unique traits and beneficial features, is suita-ble to overcome most
of the challenges which MSMEs are currently facing.
We believe that the extent to which the MSMEs will be willing to adopt this new
innovative tech-nology will depend on various socio-technical factors which revolve
around people (such as availability of skilled labor and education), processes (such as enterprise strat-egy and market opportunities), and technology (such as technological infrastructure and technological capabilities).
This is because, in the context of supply chain management, the people, processes,
and blockchain technology need to work synergistically for grad-ual adoption in niche
areas and eventual scaling and deployment on a large scalBlockchain technology due
to its unique feature and benefits can remove major challenges MSMEs face and this includes MSME which are situated in rural areas have mostly weak financial literacy
and inaccuracy in financial records.
Do watch: https://www.youtube.com/shorts/mxmhEv0xPgM
In addition, due to limited knowledge of entrepreneurs in small scale and medium industries all aspects of Business Financing and management like recording of
expenses and income and ability to calculate production prices and calculate
profits are not accurate.
Block chain for MSME can facilitate entrepreneurs with recording transactions,
reporting, funding and financial analysis, as well as transparency which can
make financing easy and give clarity to bankers who look in all aspects before
releasing any financial credit.