Banks Are Coming Forward to Support MSME Financing, Here's How

Financial institutions are helping MSMEs in building sustainable businesses

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MSMEs contribute significantly to India's economy but due to their conservative approach and informal nature, they lack access to formal credit as banks face challenges in credit risk assessment owing to lack of financial information, historical cash flow data, etc. Further, very few MSMEs are able to attract equity support and venture capital financing.


Lack of information about various schemes deprives MSMEs of availing benefits offered by Government, banks and other agencies. Even access to information about market opportunities is suboptimal and unstructured. Financial institutions are now coming forward to help these pillars of the Indian economy in building sustainable businesses.

The Scope

A recent report had suggested that micro, small and medium enterprises (MSME) sector provides the banks with a lending opportunity of $70 billion. Ever since demonetization and GST implementation, the sector has been picking itself up, which forced the Reserve Bank to offer a special dispensation under which the banks were allowed to recast stressed MSME loans under INR 25 crore.

While the sector does receive formal credit from banks, MSMEs are still underserved with only 40-70 per cent of financial requirements being met by banks. As of February 2019, MSMEs accounted for over $55 billion of lendings, signalling a huge gap that financial institutions need to address. Banks are now taking certain steps to make the lending procedure flexible for the enterprises.

The Rise of PSBs

The share of public sector banks in lending to micro, small and medium enterprises (MSME) has reduced from 58 per cent in December 2013 to 39 per cent in December 2018. While the sector has expanded rapidly, private sector banks continue to be the single biggest lender to MSMEs with 33 per cent of the market share in lending to the sector.

"Going forward, PSBs would be able to claw back some of the share losses as more PSBs come out of the PCA framework. Their market share growth will also be aided by the continued funding constraints being experienced by the NBFC segment," a report had said.

PSBs Upping the Ante

Touted as India's largest private sector financial institution, YES Bank is targeting a disbursement of INR 100 crore during the financial year 2019-20 through the bank's MSME portal. The bank launched its end-to-end digital offering, Click OD (Overdraft) to address MSMEs' need for timely and hassle-free access to working capital finance without documentation.

Another of PSBs, ICICI Bank recently organized a conclave for MSMEs (Micro, Small and Medium Enterprises) to discuss the role of digital banking to make business more convenient to the segment. The bank has strategically designed digital banking products offering innovative solutions in order to help MSMEs do business with ease and scale up operations.

Initiatives by International Banks

In the latest step taken by a banking institution, Standard Chartered an open platform for MSMEs under SC Ventures to enable them to access a range of financial and business solutions. The technology platform will be one of the first to provide holistic solutions to SMEs in India.

"There is a huge opportunity in India to enable millions of SMEs to realize their full potential. This platform addresses a wide range of SME needs through a completely different model which simplifies the SME growth experience while putting control at their fingertips," Zarin Daruwala, the Chief Executive Officer of Standard Chartered Bank (India) had said in a statement upon the platform's launch.

Public Sector Banks Catching Up

In a bid to contribute to the sector, State-owned Corporation Bank launched 'SMESuvidha' scheme to provide loans to the GST-registered MSMEs at affordable interest rates in March. The product is designed as a part of the lender's efforts to improve service and provide best products to MSME sector, the bank's MD PV Bharathi had said in a statement.

SMESuvidha provides a competitive interest rate structure in the industry and also has various concessions suiting the developing entrepreneur. Corporation Bank has already launched an online loan facility for MSME borrowers and offers customized loan schemes through its dedicated 177 'Specialised MSME Branches' across the country.