Banks are gearing up to bridge vast gap in MSME financing

With more than 30 million enterprises, the micro, small and medium enterprises (MSME) sector is considered an important vehicle of faster, sustainable and more inclusive growth of the Indian economy. It provides the second largest source of employment to more than 70 million persons. Its contribution to the economy is also very significant: directly and indirectly, almost 45% of the manufacturing output and around 40% of the total exports are by this sector. Besides being highly resilient with greater capital productivity, the sector also contributes greatly towards reducing regional disparity and thereby raising the socio-economic empowerment level.While the sector is striving to harness its growth potential, it faces a number of issues and challenges. The Prime Minister’s Task Force on MSMEs has identified various such issues like lack of credit, high cost of credit, delayed payments, procurement of raw materials at a competitive cost, lack of access to global markets, inadequate infrastructure facilities, low level of technology modernisation, lack of skilled manpower marketing, revival of viable sick units, so on.The issue of adequate, timely and affordable credit to the MSME sector has been drawing the attention of policy-makers since long. There still remains a wide credit gap for the sector. According to a study by IFC-Intellecap (2011), the MSME financing gap (both debit and equity) for the FY2010 was estimated at Rs7.24 lakh crore (52%), comprising credit gap of Rs4.77 lakh crore (42%) and equity gap of  Rs2.47 lakh crore (99.9%).The RBI had announced some important credit guidelines to banks on extending support to the MSMEs. They are: a target of 20% year-on-year credit growth; allocation of 60% of MSME credit by banks to micro enterprises in three stages (of 50% in FY2011, 55% in FY2012 and 60% by FY2013); 10% increase in the number of micro enterprises accounts by SCBs.Further, to encourage banks to lend more to the MSME sector, the government and SIDBI set up Credit Guarantee Fund Trust for MSMEs (CGTMSME) in 2000 to provide credit guarantee for collateral free / third-party guarantee free loans up to Rs1 crore to MSMEs by banks and financial institutions. The RBI has facilitated further by mandating banks not to accept collateral security for loans upto Rs10 lakh as against the earlier limit of Rs5 lakh.It is worth mentioning here that as on January 31,2012, CGTMSME approved guarantee for 7.34 lakh loan proposals for credit amount of about Rs34,000 crore. These supportive measures by the governt and the RBI resulted in an increased credit flow to the MSME sector, by 34.13% to Rs4.86 lakh crore in March 2011 as against an 11% increase in MSME production, thereby reducing the existing financing gap.Much, however, remains to be done as a significantly large number of MSMEs does not yet have access to credit from the organised financial sector. The financing gap is more pronounced in short-term fund requirement, equity requirements and the missing middle.Going forward, the short-term fund requirement can be addressed through creation of a robust factoring network, consequent to the notification of the Factoring Bill by the government. The equity requirement, especially the road map for the venture capital industry, is being looked into by a committee set up by the Planning Commission. The missing middle is primarily defined as loan sizes above Rs50,000 (threshold limit for micro financial institutions — MFIs) and Rs10 lakh (below which commercial banks normally do not consider assistance). Capacity building of regional rural banks, urban cooperative banks and non-banking finance companies can help bridge this gap.In conclusion, we can say that the banking system is gearing up to bridge the vast gap in MSME financing. The recommendations of the Working Group on MSME Growth constituted for 12th Five year Plan and the RBI’s Committee on Priority Sector Lending are expected to create facilitating environment for MSME financing. They will likely stipulate a sub-target for lending to micro enterprises, enhance the scope of MSMEs by way of enhancing the limit of investment to be classified under MSMEs, and promotion of venture capital funding to catalyse innovation in the MSME sector.Specific gaps in the MSME financing ecosystem, however, will now start assuming priority and a policy framework in that direction is beginning to emerge.The writer is chairman and managing director of the Small Industries Development Bank of India