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Aiding SMEs With Right Financial Support Remains Challenging

Providing right financial support to MSMEs remains a big challenge for the banking sector

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The small and medium enterprises (SMEs) have a crucial role to play in growing and making India a $5 trillion economy. Despite that, SMEs say that 93 per cent of their financing needs are met by internal and informal sources and not from the formal banking and financial institutions. And this is happening to a sector in which around 3 million SMEs contribute almost 50 per cent of the industrial output and 42 per cent of India’s total export. For a developing country like India and its demographic diversity, SMEs have emerged as the leading employment-generating sector after agriculture and has provided balanced development across sectors.

But to add to their woes, some of the recent government policies like demonetization and GST have also hit the growth and development of many SMEs.

At a seminar organized by the Confederation of Indian Industries, the issues related to SME finances were discussed at length. It was said that a large number of SMEs were unable to get financial aid from the banks. Jyoti Prakash Gadia, CII Delhi Panel on SMEs and MD, Resurgent India said, “In 1969, the banks were nationalized with the purpose of getting financial inclusion and that the banks would reach to the end masses. But it hasn't been possible yet, and we need to introspect.” Reacting to it, Arjun Ram Meghwal, the Union State minister for Finance and Corporate Affairs said the Modi Government has been giving special care to the sector through various reforms. “The scheme of Mudra loans has benefitted about 7.5 crore people and about 76 per cent of the benefiters are women,” he said. “The contribution of micro, small and medium enterprises (MSMEs) to India’s Gross Domestic Product (GDP) and employment opportunities could not be underestimated,” Meghwal said at the CII event.

Speaking at the same event, Rahul Chaudhry, Chairman - Delhi State, CII and CEO, Servel India, said: "The development of this segment is extremely critical to meet the national imperatives of financial inclusion and generation of significant employment across urban and rural areas in the country.”

Financing Challenge

As per the sixth economic census, there exist 58.5 million and employs the maximum workforce after agriculture. Yet, a number of SMEs are unable to get financial aid from the banks. Elaborating about the financial issue, Kavi Arora, Chairman, CII Regional Committee on SMEs, MD and CEO, Religare Finvest said, " The challenges that SMEs face these days are availability of credit, delays in payment by corporate and PSUs and technology up gradation and all these are linked too financial instability.”

While the bankers acknowledge that all the MSMEs aren’t able to get the loans from the organized banks and if they are, it is not the right amount. The stress among the MSMEs reflects the health of the banks. "For MSMEs to get loans, they need to strengthen their balance sheet. Their technology should be up to date to face the national and international competition. For bankers, MSMEs hold an important position," stated Ravi Kishan Takkar, Managing Director and CEO of UCO Bank. Kishore Kharat, Managing Director and CEO, Indian Bank said that 90 per cent of funding that MSMEs get are from unorganized sector. The cost of finance remains very high. Also, keeping the tax angle in mind, the MSMEs don't always reflect the true pictures (in terms of the numbers). They need to capture their turnover properly so that they can get the right loan.” Apart from this, the analysis by Resurgent India Ltd suggests elimination of biasness from assessment procedure would help curb the urban-rural divide.

Transitional Phase

Talking about the impact of GST on the MSME sector, the minister said there were teething problems that the SMEs are facing but there are also many indirect benefits. Citing an example, he stated, “The truck that used to take 6 days to travel from Jammu to Chennai now takes 3 days prior to the launch. This would definitely help the SMEs.” Meghwal said he believed that if  the 19th century was Europe’s (time), United Kingdom led it. 20th century was North America’s, America led it. If 21stcentury is the time of Asian economy, then India should lead it. He emphasized that everyone needs to come in the system to ensure the development of the country. Ravi Kishan Takkar added that the informal economy consists of 40 per cent of formal economy and has approximately 90 per cent of the labour force. GST is an attempt to bring informal economy into formal economy.

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