Micro, Small, and Medium-Sized Enterprises, or MSME, are thought to be the foundation and a key component of economic growth. Nearly 40% of the gross manufacturing output and 45% of all exports are attributed to the MSME sector. It is thought to contribute about 8% of the country’s GDP. This sector is the second largest provider of employment after agriculture. The expansion of the MSME sector has the potential to promote financial independence and self-reliance. Along with improving the local economy, the growth of the MSME sector has the potential to enhance the social and cultural makeup of a region. It would help to reduce emigration to urban areas and fend off an ongoing influx of newcomers. Despite all of the advantages, the MSME sector has not yet been able to gain the trust of bankers and lenders necessary to obtain MSME loans. This is particularly true given the strategies used by bankers and lenders.
What are MSME loans?
The MSME loan is a form of commercial loan that is given to enterprises for the purpose of beginning a firm, growing, or addressing other business needs.
Simply put, an MSME loan is any credit facility made available to MSMEs to help them with their financial needs. The Reserve Bank of India’s priority sector lending rules is thought to apply to all bank loans to these MSMEs.
Preference for large business
When it comes to granting business loans, banks and non-banking financing organizations typically favor large corporations. This trend stems from the idea that larger companies have superior assets to protect them. And have a lower failure rate than micro, small, and medium-sized organizations (MSMEs). Despite the government and RBI making arrangements to streamline the procedure and approval of MSME loans and SME loans, this pattern of thought persists.
The gap in demand and supply of MSME loans
It has been noted that the majority of MSMEs self-finance their operations because they do not have access to institutional financing. Despite being regarded as the foundation of the economy and despite numerous initiatives and programs to encourage MSME schemes, there remains a substantial gap between the demand for MSME funding and the supply of loans from banks and non-banking financial institutions.
Lenders opt to play safe
Even though MSMEs have a very high success record, lenders want to be safe by avoiding accumulating non-performing assets. Big firms do fail, it’s only that lenders are terrified of having to deal with complications when trying to get their money back in the unfortunate case that an MSME defaults.
Lenders prefer to give loans against collateral
Almost all banks prefer to only lend money to MSMEs in exchange for property, gold, or bank fixed deposits as security. Amounts between Rs 30 million and Rs 150 million are approved for MSME loans against property. This pattern is being followed mostly as a result of the risk mitigation strategy. These are what banks have implemented in an effort to secure their business loan portfolio.
Lack of good record management by MSMEs
The lack of effective record management tools for MSMEs is one of the flaws that prevent financing for this sector. Due to this aspect, MSMEs are perceived as riskier firms and have low credit ratings. A solid credit score also helps a lot in getting your business loan accepted. Just like it does with any other loan.
