Part 2 - Financing of SME remains main hurdle

Published on Saturday, January 16, 2016 by Dilip Davda | Modified on Thursday, April 20, 2023

Role of Banks in MSME Financing

Availability of timely and adequate credit is a prerequisite to enable Indian MSMEs to expand and scale their operations.

With a view to enhance banks' credit to the MSME sector, the Reserve Bank of India (RBI) has issued timely guidelines on lending to the priority sector. According to RBI guidelines, all loans granted to the Micro and Small Enterprises (MSEs) under the MSME segment are classified as a part of priority sector lending. Under the priority sector lending targets of all scheduled commercial banks (SCBs) for the MSE segment, banks are required to extend 60% of total MSE sector advances to:

• Micro (manufacturing) enterprises having investment in plant and machinery below 2.5 mn.
• Micro (services) enterprises having investment in equipments less than 1 mn.
• Furthermore, all SCBs are required to achieve 20% Y-o-Y growth in credit to MSEs and 10% annual growth in the MSE accounts.

More from this series:

1. Part 1 - SMEs in India - Current Status & Hindrances
2. Part 2 - Financing of SME remains main hurdle
3. Part 3 - SMEs Stock Market Listing Benefits Explained

Issues and Challenges of Indian MSME Sector

Despite the sector's strategic importance in overall industrialization, employment generation, and achieving a balanced socio-economic growth, MSMEs are confronted with several challenges that threaten to derail the sector's growth performance. The most common challenges faced by the MSMEs include inadequate access to timely and adequate credit, inadequate infrastructure, lack of availability of skilled labour, lack of availability of adequate technology, inadequate marketing and branding, and delayed payment from the clients.

Inadequate access to Credit

MSMEs have traditionally relied on bank finance for their operations as well as for business expansion. Hence, access to timely and adequate finance is crucial for the growth and development of these enterprises.

Inadequate Marketing and Branding

Marketing and branding has been another key area of concern for SMEs mainly due to unavailability of finance and lack of awareness on appropriate marketing and branding strategy. Most of the MSMEs fail to get enough buyers or generate enough enquiries because of their inability to develop Unique Selling Point (USP) for their products or services. Their lack of market awareness and difficulty in identifying the USP of their product and service makes it difficult for them to understand their target audience.

Lack of availability of skilled labour

Despite playing a major role in employment creation, SME entrepreneurs find it difficult to obtain skilled labour. While the competitiveness of MSMEs depends on availability of timely and adequate finance, effective marketing and branding strategy, and use of appropriate and updated technology, the availability of skilled labour is the key parameter that can enable an MSME to become competitive. Though the National Policy on Skill Development has set a target of training 500 million people by 2022, the industry has to contribute to building up a large base of appropriately skilled workforce available for employment in MSMEs. Industry associations have to play a pivotal role to upgrade the skills of the workers and acquaint them with skills compatible with the new technology.

Government Initiatives for development of MSME Sector

Realizing the importance of the MSME sector to the Indian economy, both the central and state governments have taken various initiatives to strengthen and enhance the competitiveness of MSME sector. This is evident from the subsequent passing of the MSME Development (MSMED) Act in 2006.

Read More...

• The Process of SME IPO - Step-by-step Guide to Schedule IPO
• SME IPO - Cost of Fundraising (Fees & Expenses)
• SME IPO Listing - Key Requirements & Eligibility Norms
• Post Listing Compliance for SME Platform
• Part 1 - SMEs in India - Current Status & Hindrances
• Part 2 - Financing of SME remains main hurdle
• Part 3 - SMEs Stock Market Listing Benefits Explained