MSMEs are the second-largest employment-generators in the country after agriculture. MSMEs account for 45% of industrial output, 40% of total exports, employs 60 million people, creates 1.3 million jobs yearly, produces more than 8000 quality products and 30 million SMEs account for 90% of industrial units in the country. The National Manufacturing Policy (NMP) aims raising share of manufacturing to 25% of GDP.

While the above remain established facts that make MSMEs the backbone of India’s economy yet this sector is constantly stressed for finance and struggles to survive. Credit flow and availability of timely and cost-effective funding options are critical to growth of this sector and this is a major hinderance in expansion of SME’s.

The 2015-16 budget did announce many schemes to assist this sector such as:

  • ‘Mudra Bank’ with a corpus of Rs 20,000 crore
  • Credit guarantee (CGTMSE) fund of Rs 3,000 crore
  • Creation of a Trade Receivables Platform to finance receivables from corporates and other buyers, through financial institutions to help strengthen the liquidity position of MSMEs
  • Creation of Rs 1,000 crore fund for self-employment and talent utilisation
  • Allocation of Rs 1,500 crore for National Skill Mission toward skill development
  • Development of a comprehensive bankruptcy code by 2015-16 will facilitate easy exit from sick or non-profitable ventures.

While all this is well and good and will certainly help this sector yet the fact remains that source of finance for MSME’s would largely be debt financing and the delivery of these schemes to MSME’s would be through the banking sector mostly. Equity funding and capital finance are not really an option available to MSMEs, not as of now atleast.

The concern here is that though banks are making strides in this direction but their approach remains restrictive. Bank’s propensity towards controlling and managing risk, gauging collateral support and massive paperwork are the roadblocks for MSME’s when it comes to getting financed.

A research done by Dr Ram Jass Yadav of BoB Staff College reveals the unpreparedness and misalignment of the internal ecosystem of banking sector with the cause of SME’s. Here are some of his findings:

  • While most bank officials receive basic training on credit, very few, just about 16% receive comprehensive training.
  • Posting in loan divisions is considered uninspiring and 11% incumbents are unwilling or forcefully placed.
  • 52% officials consider posting to loan divisions as less rewarding in terms of promotions, overseas assignments and incentives.
  • Most officials are scared to lend because of staff accountability. Survey favours more flexible and lenient accountability norms.
  • Few officials endorsed the idea of making credit sales to SMEs as a KPI at all levels

Banks pursue collateral based financing with a lot of aggressiveness and that is the reason we never stop receiving calls for Car Loans and Home Loans. How many times however do we receive calls asking if we are an SME and need finance? The aggressiveness for SME lending is just not there. It’s not in their eco system yet.

Born and brought up thinking risk management, it is difficult for the banks to come out of the mindset of collateral security. To the extent that even with availability of the Credit Guarantee scheme, banks still feel unsafe to suggest the scheme and insist on a collateral based loan and collateral is usually not available with the promoters of Micro or Small enterprises.

If SME financing is to become a reality, the banking sector will need to bring in a mindset for lending to MSME’s without collaterals, rethink risk management and push schemes like CGTMSE, create Centers of Excellence to impart specialised credit training, make it’s internal eco-system more lucrative for it’s officials serving in the loan divisions and finally, start showing the same aggressiveness towards MSME lending and they do towards other collateral based lending.

Unless this happens, Government can launch as many schemes, great conferences and debates can go on happening on the subject of MSME financing but there will be little light at the end of this tunnel.

SME Finance – A Game of Mindset
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