DUE TO VARIOUS REASONS, the MSME sector always finds it difficult to get finance at the correct cost. Although the government has recognized the problems of MSMEs and has launched various schemes for their benefit, many small businesses in India stumble on loan eligibility. Let us learn more about the challenges MSMEs face in getting finance at the correct cost.
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MSMEs And Micro Units
India has around 6.3 crore MSMEs, and the sector contributes significantly to the socio-economic growth of India. It employs around 120 million people and contributes 30% to the GDP. It is also internationally competitive and accounts for around 45% of the total exports. MSMEs work hand in hand with developing the nation’s backward and rural areas and encouraging innovation. Owing to their small size, MSMEs face various challenges, and one of the most important among them is getting access to funds. The Indian government. Among the MSMEs, nano-enterprises and survivalist enterprises, categorized as micro-units, face more significant challenges than their MSME counterparts.
Micro units form a considerable majority of MSMEs and constitute around 99% of the total number of MSMEs. Out of micro-units, nano-enterprises form a majority. Snacks counters, catering services, beauty salons, fashion boutiques, and small retail or Kirana shops belong to the nano-enterprises category. The 73rd Round, NSSO results of 2015-16, indicated 62 million informal enterprises with less than 20 workers, 65% of which were single-worker units. These are survivalist enterprises with an annual turnover of a few lakhs of rupees.
CGTMSE, PM SVANIDHI and MSMEs
The government has realized the challenges MSMEs face. It has launched various schemes, such as the Emergency Credit Line Scheme, CGTMSE, the PM SVANIDHI (PM Street Vendors AtmaNirbhar Nidhi, which offers street vendors loans of ₹10,000), etc., the impact has not been as envisaged. Some of the reasons are as follows:
- Disbursement of loans are not fast, and this affects the MSMEs
- Banks are not excited by the schemes
- Lack of awareness and knowledge among the MSMEs who often approach banks and other lending institutions without a proper business plan
- Implementation difficulties
- Lack of data and knowledge about Nano enterprises, which are not featured in surveys due to their informal nature.
Details And Results Of A Recent Study Done On Nano Enterprises
Recently, a study about a large set of nano units collected by deAsra Foundation, a non-profit organization based in Pune, has been aiding many micro-enterprises for a long time.
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- An MSME loan initiative program, which was created to match borrowers with a prospective micro-lending financial institution, aimed at decreasing the search cost for both the parties involved.
- MSMEs had to submit biographic, business, and financial information based on which they were selected.
- Through this forum, MSMEs could choose from a pool of NBFCs for a loan. Applying however did not mean approval.
- MSMEs had to provide the loan amount, business type, business age, address proof, bank statements, co-borrower’s identity, and UPI identity to qualify for the loan
The findings from the study done were as follows:
- Only 49% were found to qualify for a loan from one NBFC.
- The pin code, loan amount, and business age were the most crucial parameters for NBFCs. The postal pin code was important because NBFCs chose applicants to provide loans from particular locations.
- MSMEs with a business address proof, co-borrower, and a bank statement had higher odds of qualifying.
- It was also found that an individual/proprietorship business had a considerably greater chance of approval than a private limited or partnership firm.
- Females were more likely to qualify than males
- The majority of the entrepreneurs who applied were in the age group of 30 to 40 years.
- Applicants in the age group of 40 to 50 years had greater chances of loan eligibility.
- Businesses with business ages between 11 to 20 years formed the primary eligibility group. The next major group had a business age close to 10 years.
- Various NBFCs had various preferences for business type (industry/sector), showing that they did not specialize in giving loans to particular industries
- As far as loan defaults were concerned, the number of late payments was higher in the case of smaller loans as compared to larger ones. However, women procured a greater number of smaller loans and defaulted less.
- Most defaults were on working capital loans.
- Many entrepreneurs who had bank accounts claimed that they did not have access to NEFT facilities and that they did not possess bank statements, which shows a lack of knowledge.
The problem of more micro and small businesses loan is stumbling on loan eligibility can be resolved as follows:
- Adequate training should be provided: From the findings derived through the above survey, it can be concluded that training was the need of the hour. Two reasons for this are that small loans and working capital loans had more defaults, and while younger entrepreneurs applied for more loans, the older ones had higher chances of qualifying for the loan. This shows that experience is valued, and it calls for training again. The lack of awareness can be resolved by training as well.
- Initiatives to make MSME owners financially literate
- Lack of awareness and knowledge must be tackled
This study has enabled us to realize the challenges MSMEs face about financial access. It has also brought to light the issues that necessitate intervention. It can also conclude that a business’s geographical location may be vital for procuring loans from micro-lending schemes. For this study, most of the MSMEs were from Maharashtra, but in the future, let us hope to conduct a study involving micro-firms from a broader range of geographical locations. It can use to inform public policy.