MSME (Micro, Small, and Medium Enterprises) across the country are gaining priority for planners, policymakers as well as regulators, who look at the sector as key to solving the challenges of improving competitiveness, raising incomes, inclusive growth, generating employment, ensuring equal income distribution, halting labour movement from rural to urban areas, and increased exports. MSMEs face a number of challenges, but the government is doing its best to ensure that the MSME sector remains competitive.

Challenges in the MSME sector

Access to finance

Access to formal sources of finance has always been an issue for MSME units. MSMEs lack access to formal sources of credit due to the informal nature of functioning as an entity. Banks and NBFCs face challenges in the credit risk assessment of MSMEs owing to a lack of financial information, historical cash flow data, absence of collaterals, lack of trust in loan repayment capabilities, etc. This results in entrepreneurs being forced to rely on their own sources or borrow funds from the market at a much higher cost. Access to alternative sources of finance in the market, such as equity support and venture capital financing, is limited in nature. In either case, it causes much of their survivability and sustainability in the longer run.

Suggestions: The following few suggestions shall help the entrepreneur secure finance from banking, non-banking, and other sources.

  • Selection of specially designated / specialised MSME branches by entrepreneurs shall help them with the issue of accessibility to formal sources of finance.
  • Entrepreneurs endeavour to submit the loan application through online / digital mode to ensure that the application is disposed of by the bank within the stipulated time limit prescribed by the RBI.
  • Entrepreneurs must seek need-based credit to enable banks and financial institutions to evaluate projects in a timely manner and release funds.
  • Prescribed loan application forms should be used by entrepreneurs seeking bank loans, which are available on the bank’s website or from the bank branches. No application of the MSME entrepreneur is rejected without the concurrence of the higher authority.
  • Banks do not insist on collaterals for loan requirements up to INR 10 lacs by MSME entrepreneurs.
  • Loans covered under CGTSME, where no collaterals are required, can be granted up to a limit of INR 500 lacs.
  • The lands on which the plant and machinery are commissioned are taken as primary security along with the other assets created through bank finance.
  • The entrepreneur shall always endeavour to seek its WC requirement as well as its term loan requirement, preferably from a single bank, for proper monitoring.
  • In cases where it is observed that the realisation of debt is likely to be delayed, entrepreneurs may demand finance against receivables beyond 90 days.
  • Regulation of drawings in cash credit accounts is based on stock / book-debt statements submitted by the entrepreneurs. Hence, ensure timely submission so as to enable the entrepreneur to draw the maximum funds within the sanctioned limit.
  • In case of excess borrowing, the amount is to be carved out as a working capital demand loan to enable the unit to function properly. Banks are financing such requirements based on the fund flow statement of the unit.
  • Entrepreneurs can make a formal request against short-term emerging needs such as temporary overdrafts or excess over the limit sanctioned by banks instead of resorting to high, costly funds from outside the banking folds.
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