Credit options available for MSMEs

The overall credit gap in the MSME sector is estimated to be approximately Rs. 25.8 trillion. 96% of this unmet credit demand comes from the micro and small enterprises which still remain the most underserved segments.

Let’s look at the various financing options availed by the MSMEs through the various stages of maturity.

The data suggests that at an early stage, the businesses rely more on financing from friends, family and other informal sources. As the businesses enter the growth and achieve a level of maturity, the banking, NBFCs and other options open up for them. The non-availability of reliable credit information or collateral/guarantee are the major reasons inhibiting banks from financing businesses in the early stages. While these reasons are widely acknowledged, there are other challenges often cited by the MSME owners some of which include:

1. Lengthy loan application and approval processes - The banking loan procedure can take more 3-4 months for businesses in the early and growth stage. Lack of single window operations adds further to the delays

2. The complexity of the loan procedure – Businesses often have to go through several complicated procedures and paperwork beyond what is the stated on the loan application

3. The high processing fees charged by financial institutions

In addition to the above reasons, there is a general lack of awareness among the SMEs about the available credit schemes.

So, what are the options that the MSMEs can utilize with their existing constraints. There are financing options such as early-stage investors, venture capitalist, IPOs for the businesses that have acquired a scale which are underutilized. Platforms such as TReDs and peer-to-peer platforms (Faircent, Lendbox, RupeeCircle,etc.) are also gaining popularity among the MSMEs. The transaction based financing and other alternative financing options offer a convenient and quick credit line especially for micro and small businesses.

For the more mature businesses, NSEs SME Exchange listing (through IPO) offers a number of benefits including greater visibility, better credibility, greater access to formal credit, ESOPs options for talent attraction and unlocking valuation of the business.

For making the credit more accessible, there is a need for concerted efforts from the financial institutions, government and the MSMEs.

Firstly, the government needs to increase the awareness of the funding schemes and programs available to MSME, simplify the procedure for availing credit, develop a faster mechanism for disbursing credit and reduce the burden of legal compliances on MSMEs.

Secondly, the financial institutions need to design instruments meeting the short-term loan requirements especially of micro and small businesses, develop alternative underwriting models, simplify the documentation requirements and become trusted financial advisors for MSMEs rather than being simply financiers.

Lastly, the businesses from their side can ensure proper registration of their businesses, GST compliance, robust governance mechanism, transparent book keeping & accounting practices and participation in networking events, webinars and self-development programs.

Author – Aditya Shaligram (Cofounder/Partner SMBNEXT Pvt. Ltd.)

This is a personal blog. Any views or opinions represented in this blog are personal and do not represent those of people, institutions or organizations that the owner may or may not be associated with in professional or personal capacity, unless explicitly stated