Alternate Finance: What are your options as an MSME?
MSMEs are considered to be the building blocks of India’s economy as they comprise a significant chunk of the organized business sector in India, providing employment to a large section of the population. As per the ministry of micro, small and medium enterprises, more than 7.9 million MSMEs are functioning across various sectors in India. Together these MSMEs contribute around 30% to the GDP.
MSMEs, hence, undoubtedly are indispensable to the Indian economy. However, despite being so important to the economy, MSMEs face a lot of challenges in managing their finances and working capital management. The two major challenges for MSMEs are lack of adequate financing and cash crunch.
Liquidity crunch: Around 45% of MSMEs faced extreme cash shortages to make regular payments during the pandemic while the segment had a 20-50% drop in revenues. Last November, there were close to 45000 applications filed for debt resolution. The manufacturing sector suffered the most. There were 6.3 million job losses in the first phase of lockdown and 13.3 million in the second. The unemployment rate shot up to 7.1 in the segment in November last year. These numbers are worrisome and the situation hasn’t become any better so far.
In spite of the government of India focusing on liquidity and credit policies for MSMEs, the credit flow to the MSME hasn’t been ample. As per the trade estimates, less than 5% of MSMEs in India have access to formal credit. One of the major challenges has been the reticence of banks and NBFCs to extend credit to MSMEs due to high perceived risks. Despite provisions of collateral-free loans, banks don’t extend credits to the MSMEs.