While MSMEs are recognized as the growth engine of the economy, their funding requirements are more often relegated to the bottom of the preferences. There are varied reasons for this. Bankers who handle MSME financing discuss the existing system and its shortcomings:
A recent report by rating agency CRISIL says the lending potential of MSMEs is 15 trillion from all sources. Another report produced jointly by ASSOCHAM and Ashvin Parekh Advisory Services puts the potential for bank lending alone at 5 trillion. The CRISIL study also maintained that the market for the financial institutions is slated to grow at a CAGR of 7% in the future. The latter report says that the MSME sector is underserved with only 40-70% of financial requirements being met by banks. At present., the sector accounts for over 3.5 trillion in lending.
But how easy it is for these units to secure funding from the traditional sources? Again several studies suggest it is difficult for a majority of them to get finance on time. One reason often cited by MSME watchers is the lack of financial literacy among these entrepreneurs. For example, even established MSME units do not rely on online lending. Similarly, many of them are unaware of the new age financial institutions that offer funding easily, instantaneously. They prefer traditional banks to alternative lending institutions to avail credit at a low rate of interest in spite of the fact that banks have laborious documentation processes and strict criteria in sanctioning loans.
ACCESS TO CREDIT
There are multiple reasons why a large number of individual MSME units still find it difficult to access credit on time, says Manish Kothari, senior executive vice president and business head (Corporate Banking), Kotak Mahindra Bank. “The important among these are: (a) lack of formal data with these MSME businesses (since most of them are still unregistered and do business as a sole proprietor/ partnership in an informal way) – which is needed to access credit from the formal channel, and (b) high cost to serve for lower ticket lending (to micro enterprises) – through the regular lending process for the banks / financial institutions.”
This story is from the March 2019 edition of Banking Frontiers.
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This story is from the March 2019 edition of Banking Frontiers.
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