Banking Lending for MSMEs Key Bottlenecks and Solutions

Micro, small, and medium enterprises (MSMEs) have emerged as a leading contributor to the country’s economic growth. These enterprises have brought the country’s vision for economic growth to reality, and banks and governments have also realised their importance. Over the years, many schemes have been introduced to promote the growth of MSMEs. 

Let’s delve into a detailed study of the landscape for MSME lending in India including the challenges, strategies and loan initiatives. 

The Current Landscape for MSME Lending in India

Over the years, micro, small and medium enterprises have been involved in different sectors ranging from manufacturing to designing and distributing. At present, around 63.4 million units are operating as MSMEs and together they have contributed to pushing the country’s exports by 46%. These enterprises have done impressive work in reducing unemployment by offering over 110 million jobs in different sectors.

According to a recent study, the Indian MSME landscape is expected to grow to $1 trillion by 2028. These impressive numbers have been possible simply because of the initiatives taken by the government to create an accessible lending structure for MSMEs in India. At present, there are various lending schemes offered to suit the varying needs of MSMEs: 

• Credit Guarantee Fund Trust for Micro and Small Enterprises 
• The Prime Minister Employment Generation Programme
• Raising and Accelerating MSME Performance 

Key Benefits of Lending Solutions for Indian MSMEs

Flexi Loans (Trillion Loans Fintech Private Limited)

MSMEs have benefited highly from flexi loans. As the name suggests, flex loans are designed to offer flexible, affordable and accessible funds for MSMEs. These loans can unlock the full potential of MSMEs in India. Here’s how flexi loans for MSMEs are helpful: 

• Access to Capital: One of the biggest challenges faced by MSMEs in India was the lack of access to capital to implement their expansion strategies. Lending solutions have provided easy access to capital for MSMEs through various loan schemes dedicated specifically to MSMEs.

• Flexible Loan Repayment: The loan repayment options under the lending solution for Indian MSMEs have been kept flexible to ensure a smooth working system.

• Competitive Interest Rates: Lending schemes for MSMEs are offered at competitive interest rates to ensure that the loan is not a burden but rather a solution for MSMEs. 

• Easy Verification and Approval: Unlike other types of business loans, loans for MSMEs do not require a long verification and approval process to ensure quick access to funds.  

Top 7 Challenges Faced by MSMEs in India When Accessing Business Loans

Despite the benefits of MSME loans and encouragement programs, the current landscape represents key areas of challenge that need attention. Let’s take a look at the major challenges faced by MSMEs: 

1. Lack of Trust: Although there are MSMEs loan schemes introduced by the government, lenders often view MSMEs with doubt when it comes to their capacity to repay the loan amount. This limits the number of lenders willing to help MSMEs.

2. Need for Collateral: MSMEs cannot often provide collateral that lenders approve for a desirable loan amount. 

3. Inadequate Financial Understanding: Even today, numerous MSMEs are not aware of the business loan process or loan schemes introduced by the government. 

4. Outdated Technology: The lending system in India continues to function on outdated technology largely delaying the process of application and approval. 

5. Stringent Regulations: To enjoy the benefits of MSME loan schemes, businesses first need to get a clearance that they come under the MSME category and in many instances these clearances are stringent and even corrupt.

6. Unreasonable Waiting Period: MSMEs work on limited capital at one time which brings them under the need to get instant capital from lenders. The long waiting period is detrimental to the growth of MSMEs. 

7. Lack of Modern Financial Institutions: There is a lack of modern financial institutions that provide streamlined and simple Lending solutions. 

History of MSME Financing in India

The MSME sector is undoubtedly recognised as a leading contributor in pushing the country’s economic growth, increasing exports and reducing imports. But has the sector been empowered since always? The answer obviously is No. Let’s take a look at the evolution of MSMEs and their financing over the years: 

• The Ministry of Small Scale Industries and Agro Rural Industries was established in 1999. 
• In 2001, the Ministry was divided in two: The Ministry of Small Scale Industries and the Ministry of Agro Rural Industries.
• The micro, small and medium enterprises Act was enacted in 2006 to incorporate all sectors and industries under one umbrella and streamline their management. 
• The Act classified these industries primarily in two broad categories: Manufacturing and Services. 
• The Prime Minister Employment Generation Program was introduced in 2008-09 to promote self-employment by setting up micro-enterprises. 
• Since then, there have been multiple initiatives taken by the government to provide financial aid like the Credit Linked Capital Subsidy Scheme for Technology Upgradation, Credit Guarantee Scheme, Pradhan Mantri Mudra Yojana, MSME MDA Scheme etc. 
• The union budget 2024 has taken several steps to boost the growth of MSMEs. For instance, the MUDRA loan amount offered Tarun category has been increased to ₹20 lakhs, lowered turnover threshold for buyers from ₹500 crore to ₹250 crore for onboarding the Trade Receivables Discounting System (TReDS) platform etc. 

Government and Market Initiatives

The government of India has taken several steps to promote MSMEs. Let’s take a look at initiatives that have helped MSMEs:

• Credit Guarantee Credit Guarantee Fund

The Credit Guarantee Fund Scheme for Micro and Small Enterprises was introduced to provide collateral-free term loans. Additionally, the scheme focuses on covering the funds that MSMEs have borrowed by repaying a percentage of the loan to the lender in case MSME makes a default. 

• Pradhan Mantri Mudra Yojana

Pradhan Mantri Mudra Yojana or PMMY is a refinancing scheme for small and micro enterprises operating in non-farming and non-corporate sectors. Under this scheme, the loan is provided through three schemes: Shishu Loan, Kishor Loan and Tarun Loan. 

• Prime Minister Employment Generation Programme

The Prime Minister Employment Generation Programme was introduced to deal with the challenge of unemployment by promoting self-employment. The programme promotes the establishment of micro-enterprises. 

• Credit Linked Capital Subsidy

Keeping in view the lack of technology penetration in rural areas due to inadequate funds, Credit Linked Capital Subsidy was introduced. The scheme focuses on providing technology upgradation by offering upfront subsidies of 15% on loans from financial institutions. 

A Changeover Has Begun: Overcoming Challenges and Embracing Innovation

While there have been several schemes introduced, there are areas that the MSME lending scheme can work on. Here are some practical strategies for mitigating MSME challenges:

• Leveraging Alternative Financing Options

Upgrading alternative financing options such as peer-to-peer lending, invoice financing, microloans, crowdfunding etc can help MSME overcome the challenge of access to capital.

• Upgrading Financing Technology

A key strategy for the promotion of MSME is to invest in financing technology. Upgrading financing technology will help eliminate the challenge of long waiting periods, and complicated document verification and approval. 

• Encouraging Investors through Subsidies

MSMEs need investors to step in with their big pockets and while investors might find it hard to trust the repayment capacity, the government can come in to offer subsidies to these investors.  

Conclusion

MSMEs have emerged as pioneers in boosting the country’s economy significantly. Whether it is in terms of generating employment, encouraging exports and making India self-sufficient, MSMEs have been at the forefront. The government’s initiatives and lenders’ trust in MSMEs can take India’s GDP to new heights. 

Recap and Call to Action

• Micro, small and medium enterprises are the backbone of the country’s economy and are expected to grow to $1 trillion by 2028.
• To promote the growth of MSMEs, the Indian government has taken several steps and introduced schemes like Credit Linked Capital Subsidy, Credit Guarantee Credit Guarantee Fund, Prime Minister Employment Generation Programme etc. 
• At present, the lending solutions for MSMEs face certain challenges that can be dealt with by investing in finance technology, promoting alternative lending solutions, encouraging investors and raising awareness about different schemes of government in rural areas. 

Flexi Loans: A Solution for MSMEs

• Flexi Loans are designed to offer quick and easy access to capital for MSMEs. These loans are available through quick documentation and approval processes to promise a steady flow of capital.

• MSMEs can secure loans up to an amount of ₹1 crore in just 48 hours at competitive interest rates at various financial institutions. 

Frequently Asked Questions 

1. How to Apply for a Business Loan for MSMEs?

Any MSME can apply for a business loan through online portals. For instance: At Lendingkart, business owners can easily apply online for a business loan and get instant approval and disbursal for loan amounts up to ₹2 crores.