Understanding Indian MSMEs And Their Financial Needs

Indian micro, small and medium enterprises (MSMEs) contribute around 30 per cent to India’s GDP, constitute nearly 40 per cent of total exports, and provide employment to about 11 crore people; more than half of them are located in rural India. 

In a conversation with BW Businessworld, Abhinav Suri, Co-founder, StrideOne talked about how MSMEs face legacy issues such as information asymmetry, inadequate and untimely credit, delayed receivables, technological obsolescence and negligible market linkages. Edited excerpts: 

Do you think Indian MSMEs are growing?

The number of MSMEs in India increased by a CAGR of 18.5 per cent from 2019 to 2020. Undeniably, Indian MSMEs play an important role in the Indian economy and the sector phenomenally leverages its capability of a Low-capital output ratio.

Today, India has more than 7.9 million MSMEs, as of 27 March 2022, according to the Ministry of Micro, Small and Medium Enterprises. However, the Covid-19 pandemic had the worst impact on MSMEs, as per a survey done by the National Small Industries Corporation. It found that about 9 per cent of MSMEs out of  5,744 MSMEs in 32 states/UTs have closed down due to the Covid-19 pandemic. 

This impact was cushioned by the government with the introduction of various schemes to lend holistic support. Post-covid Indian MSMEs have evolved with the adoption of digitisation and the expansion of operations across vertices like exports; by leveraging regulatory changes, access to easy finance, and the booming Indian start-up ecosystem. 

What can the government do to revive the lost small businesses? 

Even today MSMEs face legacy issues such as information asymmetry, inadequate and untimely credit, delayed receivables, technological obsolescence, negligible market linkages, etc. Many researchers have pointed out that the Indian MSMEs were also discouraged from scaling up their operations mainly due to regulatory limits on their assets.

However, the Ministry of MSME runs numerous schemes targeted at providing credit and financial assistance such as the Prime Minister’s Employment Generation Programme, Credit Linked Capital Subsidy Scheme, Credit Linked Capital Subsidy Scheme; Skill development and training schemes etc to address these gaps. 

The Indian MSMEs have also leveraged digital infrastructure and are rapidly adopting digital payments over cash, with 72 per cent of payments done through the digital mode compared with 28 per cent of cash transactions. 

Yet, a major challenge for the MSME sector still remains insufficient financing, due to which it is unable to access newer technology, scalability and infrastructure. 

This is further corroborated by a recent study (NIRDPR, 2021), highlighting that nine out of 10 MSMEs depend on informal sources for their working capital and term loans. 

Today, NBFCs and digital lending platforms are key to bridging the MSME credit gap in India and unlocking the sector’s true potential. There is a need for regulatory guidelines that are inclusive of NBFCs and encourage more co-lending partnerships with public sector banks to accelerate the last-mile penetration of MSME credit. 

How supply chain financing can prove to be a much-needed finance solution for the Indian MSME sector?

Lack of collateral discourages MSMEs from taking secured loans at lower interest rates and hence they have to rely on unsecured loans at higher interest rates. This cuts the economic viability and profitability of their businesses.

Presently, Indian MSMEs have achieved greater exposure as exports from this sector have increased and the Indian startup ecosystem has also leveraged Indian MSMEs to support the unicorns of the future. 

Supply chain financing (SCF) services could help fill the credit gap for MSMEs in a cost-effective and efficient manner. SCF consists of several options that aim to finance suppliers by using invoices and receivables as intermittent collaterals. 

SCF services can enable MSME suppliers and distributors to increase their working capital, making them globally competitive. This type of financing helps lenders raise working capital finance for MSMEs by leveraging the existing commercial relationships between MSMEs and corporates. 

What according to you are the future and upcoming growth trends for the MSME sector? 

Post-pandemic Indian MSMEs utilised government support and capabilities offered by digitisation to overcome the expected economic downturn. Today, the sector is expected to branch out into new verticles/products,  increase exports and an effort to enrich the customer experience. 

The growing NBFC/fintech sector is expected to play a crucial role in liberating financial services for Indian MSMEs as sophisticated and efficient systems/processes are being developed to deliver tailor-made credit services. Access to easy finance will enable enhanced market linkages and also improve export capacity.  

According to the Directorate General of Commercial Intelligence and Statistics (DGCIS), the share of MSME-related products in total exports during 2016-17, 2017-18, 2018-19 and 2019-20 were 49.69 per cent, 48.56 per cent, 48.10 per cent and 49.66 per cent, respectively. Clearly, the growth rate and return on investment are satisfactory; therefore, MSMEs also have immense potential to attract foreign investment in India.

How can Indian MSMEs tackle the negative impact of high inflation? 

The global market is adjusting to the world’s ‘new normal’ inflation, as rates of inflation have been in excess of 5 per cent in developed countries across the world. In January 2022, the year-on-year inflation rate for OECD countries rose to 7.2 per cent, the highest since February 1991, while the rate for G-20 countries rose to 6.5 per cent. 

Retail inflation in India has stayed above the psychological upper limit, with an 8-year high of 7.79 per cent, while the wholesale price index (WPI) rate in April 2022, was 15 per cent, which is more than double the retail inflation. The wholesale price inflation alone has increased input costs and reduced margins. 

The operating cost of MSMEs has approximately increased by 20 per cent. At this rate, the working capital of MSMEs would deteriorate further if the wholesale price inflation continues to remain in double digits.

Thus, as the global market adjusts to these inflation trends, Indian MSMEs should leverage digitisation and upcoming Fintechs to get access to quick and easy financial services. There is an immediate need to promote non-banking finance options for MSMEs, as they can enable access to quick credit for Indian MSMEs and bridge their working capital gaps. 

How does your company provide access to intelligently customised growth capital for MSMEs? 

It follows an anchor-led approach to deliver robust support to the supply chains of the Indian startup ecosystem. The company focuses on providing smartly designed customised financial solutions to MSMEs and supply chain partners of startups (anchors). This enables a distribution model that provides access to intelligently customised growth capital for MSMEs and also enables risk-efficient penetration into untapped borrower segments for our lending partners.