MSMEs across India are grappling with a significant challenge in bridging the credit gap within their businesses. Where they are not able to ensure credit from the financial institutions, the question arises of their sustainability as well. The MSMEs contribute to India’s GDP and employment generation in a considerable amount. The policy executions are also not able to properly alleviate the issue of credit. Why so? Many states have extended support to their MSMEs, creating relatively favourable conditions. However, numerous others continue to struggle due to the persistent lack of accessible credit.
Why Are MSMEs Across India Struggling to Bridge the Credit Gap?
MSMEs are the 30% of India’s GDP. It accounts for 62% of the workforce in the business sector, making it the second-largest source of employment generation. Despite this, MSMEs are not getting the credit easily. Several reasons contribute to challenges for MSMEs in employment generation. The main reason is the lack of cash flow. Small-scale companies don’t get timely payments. Their payments are frequently delayed, which erodes the trust of credit institutions. As a result, they are often denied credit due to a lack of sufficient resources to demonstrate their ability to repay on time.
To address the credit issue, the government has introduced several schemes offering incentives to boost local manufacturing and enhance exports. The finance minister also launched the scheme of a 45-day payment rule for MSMEs to receive timely payments. However, the big manufacturers and businesses had their reasons for delayed payment. Thus, they showed their inability to pay in the given time. It led to the failure of the scheme. MSMEs have also been shaken as large dealers shifted their orders to unregistered enterprises, bypassing established MSMEs. This has exacerbated the situation, worsening their challenges. However, the number of exports from the MSMEs has increased over time. The sector now contributes to 45.79% of the exports in total.
Another issue is credit penetration. The country currently experiences a mere 14% credit penetration. While the neighbouring country China has 37% of the credit penetration with 50% in the United States. There is an urgent need to significantly enhance this. The country has a credit gap of Rs. 20 lakhs crores to Rs. 25 lakhs crores which means 47% of the MSME’s credit demands are unmet. Thus, there is a strong need to meet this demand of the MSMEs. Otherwise, the sector will keep falling. The policies need a ground reality check to improve the implementation. Stay tuned for more information on our website.