Is Indian Government Doing Enough to Support MSMEs?

By supporting MSMEs, one can ensure access to better opportunities and standards of livings for the rural population.

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By Mohit Sahney


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The widespread MSME sector has been viewed as one of the leading sectors for job creation, growth and development in India. In addition to contributing 8% to country's GDP, the sector is further credited with developing the backward sector of India, spearheading growth and development in rural landscapes. Although there is a lot of talk around uplifting the MSME sector, with newly announced programs meant for enabling its growth, the sector continues to face certain cumbersome challenges.

Capital Deficit and Other Challenges Faced by Indian MSMEs

The Indian SMEs have a small ticket size of lending. While banks and financial institutes have, for long, snubbed the MSME sector, the remains of the limited institutional funding are only available to the registered and well-documented MSMEs.

Financial institutions have to face a lot of problems in dealing with the MSME sector. While the ticket size is small, the operational expenditure is high, due to the constraints of the legacy systems and higher costs of IT vendors. Furthermore, given the lack of proper documentation and missing financial documents, financial institutes are not in a position to administer the actual risks in disbursing loans to the micro, small and medium level enterprises in India.

This further adds to the burdens of MSMEs. Not only are they operating in spaces lacking the required digital and technical infrastructure, they also have to apply to a number of lenders and financial institutions, in order to fulfill their capital requirements for conducting the business. Even unsecured business loans are a challenge since banks would either prefer secured loans to limit the risks or offer unsecured loans to only a select few enterprises.

Knocking on the doors of the informal lending sector doesn't offer much respite either. While the MSMEs may get loans from traditional money-lenders, the same is not really accounted for by any governing body. As a consequence, the micro, small or medium level enterprises may have to suffer at the hands of inflated rates of interests. In certain cases, the rate of interest goes as high as 30%, which the MSMEs must bear, if they intend to have access to capital for business. Even if they end up securing a business loan, the entire process is rather stressful and tedious, with the small scale business owners being subject to harassment or unprofessional conduct on part of private, unregulated loan sharks.

Government Support Strengthens

The Indian government has shown sensitivity towards the needs of the MSMEs. On May 9, 2007, following an amendment in the rules, the Ministry of Agro and Rural Industries and the Ministry of Small Scale industries were both brought under the Ministry of Micro, Small and Medium Enterprises.

The ministry has been designing policies and programs meant for facilitating the MSME sector. In particular, the ministry has been responsible for ensuring adequate flow of credit, supporting tech and skills upgrades, making managing practices easily accessible to the MSMEs and more.

Under the Union Budget of 2016, it was announced that the Indian government would setup MUDRA Bank for Micro-Units Development & Refinance Agency. The policy is meant to enable funding for the non-corporate small-scale business sector. The government has further backed that initiative up with several programmes, including National Manufacturing Competitiveness, Technology Centre Systems and MSME Cluster Development, with the intention of promoting MSME across several key sectors.

Room for More

Despite the right intention and introducing aforementioned programs, a lot more can be done for the MSME sector by the Indian Government. To begin with, banks should ensure that NBFCs catering to MSMEs have low cost of funds and hence are able to extend the same benefits to small scale businesses.Furthermore, the government of India should provide interest subsidy to the MSMEs, the same way it had done for the housing sector. By bringing about these radical reforms, the government will be able to solve three major challenges at once, including: employment generation, credit discipline and boosting the economy.

Once these factors are put to practice, we also have a strong chance of keeping a tab on the urban migration. By supporting MSMEs, one can ensure access to better opportunities and standards of livings for the rural population. As a consequence, rural Indians would no longer have to abandon the comforts of their roots for the pursuit of livelihoods and improved prospects.

Mohit Sahney

Managing Director & CEO, Finova Capital

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