The Small, Micro, and Medium Enterprises (SMEs) sector is vital to the economy of India. With millions of enterprises in various industries, it employs a vast population of several people. The SME sector includes major women-guided enterprises and multiple rural enterprises. In totality, the MSME sector contributes to around 45 per cent of the Indian industrial production and the exports. Although greater portion of the MSMEs is unregistered, the role of the SME sector to India’s GDP has been rising rapidly per year at a higher rate than the overall GDP growth.
Insufficient market connections and poor infrastructure can be considered as the leading factors to result in a constrained growth of this sector. The absence of proper and scheduled access to financial resources has been another major challenge. The financing requirements of the SME sector rely on factors like operation size, industry, segment of the customers, and the stage of progress.
Flow of Finance to the MSME Sector
As per the study, it has been shown that of the overall finance demand of is either self-financed or from the informal sources. Formal sources provide services to a small portion of the total debt financing of the MSME. Under the formal sector of finance, bank accounts of a greater percent of the supply of debt to these sectors comprised of the data like with Commercial Banks. The non-banking companies dealing in finance and the smaller banks like the Urban Cooperative Banks (UCBs), Regional Rural Banks (RRBs) and various other government financial institutions like the State Industrial Development Corporations and State Financial Corporation; consists of the remaining formal debt flow of the MSMEs.
Providing Environment for Development of Finance in the MSME Sector
The main pillars of the financial environment include:
- legal and regulatory framework
- government support
- financial infrastructure support.
MSMEs operate in a super competitive environment and thus require an environment to enable for sustaining growth. Proper fiscal support, incentives promoting innovation, and a durable framework of policy by the financial centers can increase the inflow of financial services to the MSME sector significantly.
Increased Access to MSME Finance
There are various potential interferences that are needed to increase the access to MSME finance in India through enabling infrastructure, risk management, and liquidity management. Some of the potential interventions include:
Enabling infrastructure
- Promoting the institutions to enhance finance and providing advisory support to rural and semi-urban MSMEs.
- Formulation of new ventures related to MSME-specific funds by enabling the existing government equity funds to allow investment.
Liquidity management
- Improving the access of debt to non-banking finance companies.
- Development of an online platform for tracking the MSME.
- Provision of credit guarantees to support the MSME finance.
Risk management
- Development of a better knowledge of the financing terms of service this sector.
- Expansion of the scope of SME’s credit information of the transaction data.
- Strengthening of the current connections with other financial infrastructure.
- debt access to the various non-banking finance companies.