Synopsis: Strong credit flows not only helps MSMEs get better interest rates, but also expand their operations. However, there is a major lack of organic credit flow to the MSME sector. Continue reading to know about the different strategies MSMEs can employ to strengthen credit flows.

The Micro, Small & Medium Enterprises (MSME) sector — the backbone of India’s economic structure — makes up 45% of total industrial production, 40% of total exports, and 35% of India’s GDP. Having said that, a large number of MSMEs are yet to be integrated into the country’s formal financial environment.

According to reports, only 14% of India’s 64 million MSMEs have credit access. A major reason being that MSMEs don’t have huge collateral to obtain loans from financial institutions or banks. However, there are various ways through which MSMEs can tackle this problem.

Read along to know more about how to strengthen credit flows to the MSME sector.

Challenges Faced by MSMEs in Accessing Credit

According to a report, the credit gap in the MSME sector is estimated to be Rs. 25 trillion. The credit gap is the discrepancy between the addressable demand for external credit and the supply of formal financing sources.

Another report projects that by 2024, the overall credit demand within the MSME sector is anticipated to reach Rs. 98 trillion, with a credit gap ranging between Rs. 37–40 trillion.

This credit gap can be because of various reasons including:

• Poor Monitoring of MSME Lending: There isn’t a clear and systematic way to keep an eye on MSME lending, especially at the branch level.
• No Proper Paperwork: Most of the businesses in the MSME sector are not officially registered. They don’t have the necessary paperwork and documents, which makes it harder for them to get a loan from a bank or other financial institutions.
• Lack of Awareness: A study revealed that there is limited awareness among MSMEs about the various government schemes to strengthen credit flow. Also, among the businesses that were aware, very few actually used them—fewer than 5% of firms using the Pradhan Mantri Mudra Yojana.

Importance of Strengthening Credit Flows

MSMEs can strengthen their credit inflow and outflow to improve their chances of securing a loan. Here are some more advantages of strengthening cash flows:

• Unlocking Export Potential: Enhanced credit accessibility empowers MSMEs to fulfil larger orders, explore new markets within the country, and play a pivotal role in boosting the nation’s export revenue, hence providing the scope to enter a global market.
• Recruit Skilled Personnel: A strong credit flow empowers MSMEs to hire more employees, thereby reducing unemployment rates and promoting growth opportunities.
• Invest in Growth Opportunities: A strong credit flow provides MSMEs with the necessary funds to invest in expansion, modernization, and technological advancements, contributing to the overall growth of the sector.
• Reduce Capital Requirement: Reduced capital requirements enable lending institutions to allocate more capital to other lending activities, promoting further credit availability.

Initiatives and Reforms for Enhancing Credit Accessibility

There are various government schemes aimed to improve MSME’s cash flow. These include the Emergency Credit Line Guarantee Scheme (ECLGS), Credit Linked Capital Subsidy Scheme, and the TReDS platform, among others.

Here are some initiatives undertaken by the government to improve cash flow in MSMEs:

• Emergency Credit Line Guarantee Scheme (ECLGS): It provides lenders with a 100% guarantee against losses if borrowers don’t repay.
• Subordinate Debt Scheme: It allows banks to provide subordinate debt up to 15% of the promoter’s stake or Rs. 75 lakhs (whichever is lower) to stressed MSMEs. This debt is intended to be infused as equity or quasi-equity in the business.
• Pradhan Mantri Mudra Yojana (PMMY): It offers collateral-free loans of up to Rs. 10 lakhs to unfunded MSMEs in various sectors.
• Regulatory Retail Portfolio Threshold: The threshold for single counterparty exposure to MSME entities was increased from Rs. 5 crores to Rs. 7.5 crores. It enables banks to assign a lower risk weight to these exposures, improving credit availability for MSMEs.

Role of Financial Institutions

Financial institutions assist MSMEs in early stages of operation by providing long- and short-term credits. The former assists them in building capital, while the latter helps meet their day-to-day working capital requirements.

Here are some more ways that financial institutions help MSMEs strengthen credit flow:

• Offer collateral-free loans, addressing the challenge of MSMEs lacking significant assets for guarantees.
• Design loan products and repayment structures tailored to the cash flow patterns and seasonal requirements of MSMEs.
• Maintain oversight over loan accounts and guide MSMEs in managing their financial obligations.

Technology-Driven Transformation

Digital solutions go beyond simply enhancing credit access; they enrich the credit underwriting process. Digital lending, for instance, has enabled quicker loan processing, facilitated the shift to digital practices, improved efficiency, and lowered the cost of credit for MSMEs.

Additionally, the government has launched various schemes that leverage technology to strengthen credit flow across MSMEs such as:

• psbloansin59minutes Portal: It was introduced to facilitate the quick approval of loans up to Rs. 5 crores for MSMEs without human intervention. Since its launch, loans totaling approximately Rs. 80,000 crores have been sanctioned through this platform as of November 30, 2021.
• Trade Receivables Discounting System (TReDS): It was established by the Reserve Bank of India (RBI) to address the issue of delayed payments to MSMEs. It offers an electronic mechanism for financing MSME receivables from buyers through an auction process. Since its inception, approximately 25 lakh invoices amounting to Rs. 55,000 crores have been discounted on the platform.

Collaboration Between Financial Institutions

Co-lending partnerships allow financial institutions, such as banks and non-banking financial companies (NBFCs), to meet the credit needs of MSMEs. Here are some features of a co-lending partnership approach:

• It takes advantage of the strengths and expertise of different lenders to give businesses a complete and useful lending service.
• In a co-lending arrangement, two or more financial institutions combine their resources, knowledge, and skills to provide credit to MSMEs.
• Each participating institution brings distinct perspectives, risk assessment processes, and financial resources to the table, resulting in a more well-rounded lending option.

Future Outlook and Recommendations

Here are some recommendations for strengthening credit flow to the MSME sector:

• Separate Loan Processing Division: Setting up a dedicated unit for loan processing can create a more effective lending environment should the loan turn into a non-performing asset (NPA).
• Promote Risk Sharing Options: Risk-sharing lending options for MSMEs include venture capital schemes and other financing options such as crowdfunding, which can make financing easier.
• Increase Awareness: Financial institutions generate awareness among their customers about various schemes for MSMEs.

Strengthen Cash Flow Through Protium Loans

Diverse approaches that engage critical participants, including banks, businesses, and government bodies, play a pivotal role in enhancing the provision of credit to MSMEs. It is imperative for financial establishments to actively participate in gathering consistent input on the challenges encountered by MSMEs. Furthermore, they should assess the efficacy of strategies while also elevating entrepreneurs’ understanding.

You can also easily apply for an MSME loan with Protium — a finance company building powerful and transformative financing solutions. At Protium, we offer hassle-free business loans with no collateral requirements. For more information, please contact us at 8828827800.