MSME funding gap: US$230bn
Demonetization of Rupee notes and introduction of Goods and Services Tax (GST) have hit the already financially-strapped Micro, Small and Medium Enterprises (MSMEs), according to a Reserve Bank of India’s (RBI) study.
The sector’s exports were also dented by the government’s two major initiatives.
Potential demand for the MSME finance is about US$370 billion as against the current credit supply of US$139 billion, according to an International Finance Corporation (IFC) estimate. There is a financing gap of US$230 billion, equivalent to 11% of the GDP.
However, the sector’s credit disbursal has recovered a tad since the lows of 2017 to reach the mid-2015 level, said RBI in a report “Mint Street Memo”.
Though micro-credit, including loans by banks and non-banking financial companies, has grown to the sector in recent quarters, exports have been hit badly since the GST implementation.
The MSME sector, with over 63 million units employing around 111 million people, contributes around 30% to the GDP, accounts for about 45% of manufacturing output and around 40% of total exports.
Hit by the two initiatives was contractual labour in the wearing apparel and gems and jewellery sectors as payments from employers became constrained after note-ban.
Similarly, GST led to an increase in compliance costs and other operating costs as most of MSMEs were brought into the tax net when 60% of them were not ready for the new tax regime, said the report.
MSMEs’ credit appraisal is a major challenge for lenders as most of these small businesses operate in niche segments. This makes it difficult to timely access adequate finance.
About 97% of MSMEs operate in the informal sector, with gross output of about 34%. The informal sector manufacturing MSMEs share in total GDP is around 5%, according to National Accounts Statistics.
On a positive note, a study by the Small Industries Development Bank of India has found that relative credit exposure initially declined due to note-ban and GST for most MSMEs but recovered by March 2018. fiinews.com
