Credit flow to MSMEs 

The role played by Micro, Small and Medium-sized Enterprises (MSME) in national economies is well recognized. The United Nations estimates that MSMEs account for 90% of businesses, 60 to 70% of employment, and 50% of GDP worldwide and recognises the crucial role played by MSMEs in local and national economies by generating livelihoods,  particularly among the working poor, women, and youth. The MSMEs in India gathered momentum through budgetary support after COVID-19 had a cascading impact and posed sustainability challenges. The Parliamentary Standing Committee on Finance, however, has pointed out some key gaps in credit flow to MSMEs that need to be addressed by the government to provide fresh impetus to the momentum. The MSMEs in the country account for 29.1% of the Gross Value Added of all India GDP and 36.2% of all India manufacturing output. Official data also shows that, as of February 5, more than 3.64 crore MSMEs, which have provided employment to more than 16.86 crore Indians, are registered on the Udyam Registration portal. The government launched the portal in 2020 to facilitate ease of registration and access to all the schemes and benefits. The registration process is free, paperless, and digital, which explains the significant increase in the number of registered MSMEs. Some of the initiatives taken by the central government to support the MSME sector are: collateral free loan with guarantee coverage up to 85 % for various categories of loan through Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) under Credit Guarantee Scheme; Rs. 50,000 crore equity infusion through Self Reliant India Fund; no global tenders for procurement up to Rs. 200 crore, rolling out of Raising and Accelerating MSME Performance (RAMP) programme with an outlay of Rs. 6,000 crore over 5 years, integration of Udyam Portal and National Career Service (NCS) of Ministry of Labour & Employment, as an outcome registered MSMEs are able to search for jobseekers ; relief by way of refund of 95% of the deducted performance security, bid security and liquidated damages was provided to MSMEs. Relief was also provided to MSMEs debarred for default in execution of contracts and the launch of the Samadhaan Portal for monitoring of outstanding dues to MSMEs from buyers of goods and services. Information furnished by the Ministry of Finance (Department of Financial Services) before the parliamentary committee highlights that two of the government’s flagship schemes, viz., the Emergency Credit Line Guarantee Scheme (ECLGS) and the Credit Guarantee Trust Scheme for Micro and Small Enterprises (CGTMSE), have benefitted the MSME sector to a great extent after it was hit hard by the impact of COVID-19 lockdowns and slowdowns in the economy. The government claims that as of July 28, 2023, loans amounting to Rs 3.68 lakh crore have been guaranteed, benefiting 1.19 crore borrowers under the scheme. Out of the total guaranteed amount, nearly 66% has gone to the benefit of MSMEs. In terms of guarantee numbers, nearly 95% have benefited MSMEs, and there has been 52% growth in guarantees approved under CGTMSE in 2021–22 over 2020–21. The committee, however, pointed out in its report that only a few MSME enterprises were managing to get collateral-free loans under the government schemes, with the majority being compelled to furnish adequate collateral even after being eligible for collateral-free loans. It drew the attention of the government to the fact that, as more than 99 percent of MSMEs belong to the micro sector, they typically have no collateral to offer to banks. The panel recommended that credit flow to the MSME sector can be strengthened with the adoption of cash flow-based lending suggested by the UK Sinha Expert Committee on MSMEs to replace physical collateral or guarantee requirements (asset-based lending) with high trust information on an MSMEs future cash flows with digitization of the products and processes on an integrated digital ecosystem. The committee’s report also states that many MSMEs, in particular, micro and small entities, are not able to avail themselves of the various benefits of improving the credit rating of MSMEs initiated by the government on time, which results in the denial of much-needed credit from lending institutions. This explains, according to the committee, why many MSMEs refrain from accessing the services and continue to borrow from informal sources. As the informal credit market charges high interest, the profitability of MSMEs is adversely affected and poses sustainability challenges, which are also dependent on other factors like price volatility, demand fluctuation, an increase in transportation costs due to a rise in fuel prices, and the rising cost of raw materials. The committee underscored the need for encouraging MSMEs to adopt formal rating processes through handholding efforts and by focusing on financial literacy to boost credit rating use adoption. The government acting on the recommendations of the panel will go a long way in improving the flow of collateral-free credit to MSMEs and creating more sustainable livelihoods.