Financial challenges and avenues for Micro, Small and Medium Enterprises (MSME) B.Vignesh17COM69Department of CommerceThe American CollegeMadurai ABSTRACTTheeconomic growth of any country largely depends upon the entrepreneurialdevelopment of that particular country.
It speeds up the process of industrialgrowth and thereby stimulates economic progress. The Micro, Small and Medium Enterprises(MSME) sector in India has been recognized for its potential in facilitatinghigher employment, production, exports and encouraging entrepreneurship. MSMEsin India are identified to contribute 25% of the Gross Domestic Product (GDP)by the end of the year 2022. Despite these leads, MSMEs face difficulties inavailing timely and adequate credit because of less access to equity capital.And even if such credit is availed, it incurs high cost to the entrepreneurs.
Thispaper is an attempt to study such financial difficulties and consequentinstitutional assistance available to them for overcoming such difficulties. Keywords:Micro, Small and Medium Enterprises, economic growth, entrepreneurial development,Gross Domestic Product INTRODUCTIONMicro,small and medium enterprises (MSME) sector has emerged as a high vibrant anddynamic sector of the Indian economy over the last five decades. MSMEs not onlyplay crucial role in providing large employment opportunities at comparativelylower capital cost than large industries but also help in industrialization ofrural and backward area thereby reducing regional imbalances, assuring moreequitable distribution of national income and wealth. MSMEs are complementaryto large industries as ancillary units and this sector contributes enormouslyto the socio-economic development of the country.
Thesector consisting of 36 million units, as of today, provides employment to over80 million persons. The sector through more than 6000 products contributesabout 8% to GDP besides 45% to the total manufacturing output and 40% to theexports from the country. The MSME sector has the potential to spreadindustrial growth across the country and can be a major partner in the processof inclusive growth.Khadiis the proud legacy of our national freedom movement and the gather of ournation. Khadi and village industries (KVI) are now national heritages of India.One of the most significant aspects of KVI is its capita investment. The KVI sectornot only serves the basic needs of processed goods of the vast rural sector ofthe country, but also provides sustainable employment to rural artisans.
KVItoday represent an exquisite, heritage product, which is ‘ethnic’ as well as’ethical’. The sector has a potentially strong clientele among the middle andupper echelons of the society.MSMEsalso play significant role in national development through high contribution todomestic production, significant export earnings, low investment requirements,operational flexibility, location wise mobility, low intensive imports,capacities to develop appropriate indigenous technology, import substitution,technology-oriented industries, competitiveness in domestic and export marketsthereby generating new entrepreneurs by providing knowledge and training. OBJECTIVES 1) Tounderstand the definition of MSMEs as per MSMED Act, 2006.
2) Toanalyse the financial challenges faced by MSMEs.3) Toidentify the institutional finance, government support functions available toMSMEs. DEFINITION Micro, small, medium enterprises asper MSMED Act, 2006 are defined based on their investment in plant andmachinery for manufacturing enterprises and on equipment for enterprisesproviding or rendering services.
The present ceilings on investment for enterprises to be classified as micro, small and medium enterprises areas follows Theterm village industries has been redefined in amended KVIC Act, 1956 as “anyindustry located in a rural area which produces any goods or renders anyservice with or without the use of power and in which the fixed capitalinvestment per head of artisan or worker does not exceed Rs.1 lakh (Rs.1.5lakhs in case of village industry located in a hilly area) or such other sum asmay, by notification in the Official Gazette, be specified from time to time bythe central government. KEY FINANCIAL CHALLENGES Scarcity entails that resources are never adequate to meetthe unlimited needs of any society. The SME sector is oneof those sectors that require significant financing.
The sector is peculiar inthat it is now the engine of economic growth after the tremendous structuraltransformation that took place in the economy over the last decade.Accordingto the World Bank, formal SMEs contribute up to 45 percent of total employmentand up to 33 percent of national income (GDP) in emerging economies. Thesenumbers are significantly higher when informal SMEs are included.Accessto finance has been cited as a major obstacle to SMEs growth in most countries.
The challenges to SME’s access to finance may be caused by certain lender-sidepriorities. They are given below.1. Highertransaction costs emerging from processing of many small loans2. Perceivedhigh risk and uncertainty due to informalisation of operations,3. Documentationrequirements and perceived cumbersome lending processes4.
Difficultyin accurately assessing SMEs cash flows 5. Liquidityconstraints, sovereign risk and the resultant high interest rates.6. MostSMEs are perceived to have a higher probability of default than larger firms.This may in turn lead banks to be generally more selective in supplying loansto them.
7. TheSMEs are a heterogeneous group with diverse players and different levels ofdevelopment and sophistication of enterprises.8. Difficultyin obtaining the information necessary to assess the risks of new and unprovenventures, which depend on skills of the entrepreneur.9. Theprobability of failure for new small ventures as a consequence is considered tobe high.10. Thelack of detailed data base of SMEs players across the country means thatfunders are not sure of how many, where and how these players operate.
11. Thedemand side constraints points mostly to firm characteristics and ownerperceptions which inhibit SMEs access to external finance. These factorsinclude:12. Noncollateraliseable fixed assets,13. Reluctanceof SME players to admit new partners to expand capital base,14.
Lackof transparency in operations as owners keep these as secrets,15. Failureto maintain proper books of accounts,16. Reluctanceto register their business17. Generalopaqueness of the operations of SMEs since there is no governance framework.18. Theregulatory constraints include the following factors;19. Thelack of detailed data base of SMEs players across the country means thatfunders are not sure of how many, where and how these players operate.
20. Lackof regulatory frameworks that can be used by the banks to assess risk suchcredit reference system and collateral registry among others21. Tightregulations on KYC information required of which the majority of the SMEs don’thave.22.
Lackof operational credit guarantee scheme in the country. The operationalisationof PCGs is crucial to SMEs success, and support can be provided to design andcapitalize such facilities.23. In-depthknowledge about the players in the sector would assist in devising fundingstrategies and intervention measures that adequately respond to the needs ofthe sector.
This requires that the potential financiers understand thefollowing imperatives:24. Thenature and dynamics of the sector in terms of product and service offering;25. Fundingrequirements;26. Riskprofiles27.
Levelof profitability;28. Accountingpractices;29. Variedcompliance levels with local authorities’ by-laws30. Thesize of various enterprises. Institutional Finance to MSMEs Finance is the basic need of every business venture. Everyactivity ranging from growth, development and diversification requires finance.Generally, banks and other financial institutions provide funds only to theextent of 75% to 80% for the amount applied for.
In other words, the sanctionedamount is always less than the collateral produced by the borrower. This meansthat the balance amount has to be financed by them. In case of micro and smallenterprises, initially work is commenced from the personal funds of theentrepreneur and later loan applications are made to financial institutions.Therefore, these industries have heavy financial risks and hence they willsucceed only if they conquer the market competition. The various financialinstitutions utilised for fixed capital and working capital are given below. Commercial Banks The commercialbanks play a vital role in providing financial assistance to trade andindustries. Presently there are 28 Nationalised Banks, 34 Private Sector Banks,42 Foreign Banks and 196 Rural Banks. Amongst these, the Nationalised Bankshave the widest coverage throughout the country including rural areas.
Thesmall-scale industries started getting attention only after RBI initiated the”Lead Bank Scheme”. SSIs usually meet their working capital needs by way ofoverdraft facilities offered by the commercial banks. Industrial Development Bank of India (IDBI) Till1964, commercial banks and private banks extended credit to the industries. Atthat point of time, the central government recognised the need of developing aseparate centralised development bank and so emerged the IDBI. It got autonomystatus in the year 1976. It works as an apex institution for term finance toindustries and coordinates the functioning of the agencies’ financing,promoting and developing the industries. Since its inception, IDBI is playingan important role in promotion of small scale industries through refinancescheme of industrial loans and by way of discounting bills. Industrial Finance Corporation of India (IFCI) IFCIwas commenced in the year 1948 with the aim of extending medium and long-termcredits to various types of industries in India.
It extends financialassistance to industries in Rupees as well as foreign currency as per theirneed. Apart from these, it helps in direct subscription of shares anddebentures and provides financial assistance for purchase of equipments to theindustries. The projects involving value of Rs.300 Crores or more are onlyeligible for availing assistance from IFCI. Industrial Credit and Investment Corporation of India (ICICI) It was started inthe year 1955 to provide funds to the developing small and medium scaleindustries of private sector.
It funds the establishment, expansion and modernisationof enterprises. It offers deferred credit, leasing credit, instalment, sale andventure capital. The assistance is given primarily for purchase of capitalassets like land, building and machinery. ICICI sanctions minimum loan of Rs.
5Lakhs and there is no maximum limit on the upper end. The private sector owns90% of the shares of ICICI. Industrial Reconstruction Bank of India (IRBI) IRBIwas started with the aim of addressing the problems of sick industrial units.Many small-scale industries get affected by various problems with the finalimpact of financial distress. IRBI assists in the revival of such industries byacting as a principal agency for credit and reconstruction. Various textile,engineering, foundry and mining industries have been benefitted by IRBI intheir rehabilitation process.
Life Insurance Corporation of India (LIC) It is anationalised body started in the year 1956 under LIC Act and is deemed to beone of the biggest money collectors in India. It was the sole Insurance Schemeorganiser until the liberalisation of 1991. LIC started giving loans forhousing schemes, rural electrification and water supply schemes. It has giventerm loans for:-New Projects – 37%Expansion and Diversification Projects – 31%Modernisation and Rehabilitation Projects – 12% State Financial Corporations (SFCs) SFCsare independent units setup in 1948 in order to provide financial assistance tomedium and large-scaled industries. Later the assistance was extended tosmall-scale units also. They provide term loans to various small, medium andlarge industries based on collaterals like land, buildings, machineries andshares, etc.
Apart from helping SMEs, they provide opportunity to sociallydeprived and backward classes to become successful entrepreneurs. Presently,there are 19 SFCs in different states of India. Support Functionsto MSMEs Mere finance is not enough for the functioning or growth of abusiness enterprise. Technical knowledge, skill, expertise, proper guidance andsupport are also equally essential for the functioning of a business.
Anentrepreneur may not be well acquainted with various government subsidies andassistance given for setting up of an industry. They may also not be familiarwith the risks associated in starting up of a business. In order to guide themin this regard, there are several institutions operating under central andstate government(s). They are given below.1. Small Industries Development Bank of India (SIDBI) – This isthe only institution involved in providing financial assistance apart fromother guidance and assistance activities.2. National Small Industries Corporation Ltd.
(NSIC)3. Small Industries Development Organisation (SIDO)4. Small Scale Industries Board (SSIB)5.
State Small Industries Development Corporations (SSIDC)6. Small Industries Service Institutes (SISI)7. District Industries Centres (DIC) CONCLUSION In the currentscenario, many MSMEs are emerging gradually. Business environment has becomedynamic due to the advent of technological advancement. India has got a greatlead in the IT industry. The overall performance and contribution of MSMEs toIndian economy is described in terms of its tremendous growth in employment,production and exports. MSMED Act, 2006 is considered as a crucial step takentowards the upliftment of small scale industries.
Despite facing variouschallenges, the MSME sector has shown excellent adaptability and resilience torecent economic recession. A rewarding feature of economic development in Indiais due to impressive growth of modern MSMEs in the days to come. REFERENCES1) P.M.Mathew, “Small enterprises and regional development:Challenges and choices”2) Anand Saxena, “Entrepreneurship: Motivation, performance andrewards”3) R.V.Badi and N.
V.Badi, “Entrepreneurship”4) Jayshree Suresh, “Entrepreneurial Development”5) Robert D Hisrich, Michael P Peters and Dean A Shepherd,”Entrepreneurship”, Tata Mcgraw Hill Education PrivateLimited6) “TheProspects and problems of MSMEs sector in India: An analytical study” ,International Journal of business management invention (August 2014)7) “MSMEsin India: Its growth and prospects”, Abhinav Publications (August 2014)8) “MSMEat a glance”, Ministry of micro, small and medium enterprises, Govt. of India9) P.M.Mathew,”MSME Definition in India: The Present State and the Imperatives” FICCI-CMSMEand ISED10) SandersonAbel, “Constraints to financing SMEs”, The Herald (Jan 2018)11) EshaDwibedi, “MSME: The Current Scenario”, India fellow blog