Micro, small, and medium-sized enterprises (MSMEs) are pivotal contributors to economic growth, particularly in developing nations, where they play an important role in creating employment opportunities and contribute to industrial production. In India, MSMEs account for 30% of the GDP and over 45% of exports. These businesses, ranging from micro business entities to mid-sized manufacturers and export-oriented entities, are at the core of the value chain of the economy. MSMEs also aid in reducing the disparity in income distribution by providing job possibilities and industrialising rural regions. The MSME sector is considered a vital engine in India’s vision of ‘Viksit Bharat 2047’.
In light of the crucial role played by MSMEs in India’s growth story, we make an effort to investigate their relevance and how they might contribute to inclusive growth, and also highlight the problems, difficulties and possibilities that MSMEs in India are facing.
Challenges for MSMEs
Access to finance: The ‘vast’ informal nature of entities and absence of relevant data puts the small enterprises at a disadvantage in accessing formal finance from banks and other regulated financial intermediaries. Further, access to capital markets by MSMEs or listing on SME exchanges is underpenetrated, may be due to them shying away from growth to continue to avail benefits extended to the sector. Other reasons may include vulnerability to macroeconomic shocks impacting valuations of SMEs and lack of awareness regarding the processes of listing.
High collateral requirements: High collateral requirement is a major hurdle for MSMEs seeking finances as they often lack significant assets. This restricts their ability to expand their enterprises and also stifles innovation. Businesses with promising ideas may not be able to secure funding to develop prototypes, conduct market research or adopt new technologies.
Limited financial literacy and managerial skills: Many MSMEs struggle with a lack of financial literacy and management skills. This creates a roadblock to their long-term success. Many MSME owners lack the expertise to effectively manage cash flow. This can lead to poor budgeting practices, unnecessary spending, and difficulty gauging profitability. Without understanding financial instruments, they might miss out on better loan terms, supplier negotiations, or strategic investments that fuel their growth.
Regulatory compliance burden: Compliance with regulatory requirements sometimes eats away valuable time and resources of MSMEs, and regulators are constantly working on solutions. Initiatives like streamlining regulations, offering online filing platforms, and providing temporary exemptions for start-ups aim to ease the compliance burden. Uneven implementation across states, limited awareness of support mechanisms among MSMEs, and the inherent complexity of the regulatory landscape are hurdles.
Market competition and globalisation challenges: The MSME sector often finds itself on a tightrope walk with globalisation. Foreign companies, armed with advanced technology and economies of scale, pose significant competition and sometimes undercut Indian MSMEs on price and quality. This can limit market share and push MSMEs to constantly innovate just to stay afloat.
Financing options
The government is taking significant steps to bridge the gap MSMEs face in terms of availability of finance. The foundation laid in the form of Public Digital Infrastructure—India Stack—is a robust digital infrastructure that has promoted innovation in financial services. The various digital rails of India Stack are now the foundation of creative tools being developed for improving credit flow to the MSME sector.
The Open Credit Enablement Network and Account Aggregator framework shall be other significant additions to the layers of India Stack. These additions will enable formal credit to flow at a relatively faster pace to the most vulnerable groups, particularly small businesses, with shorter repayment periods if desired. These platforms will also provide financial institutions with an opportunity to reach large groups at lower cost of services or distribution. With Open Network for Digital Commerce facilitating all service providers at one place, the platform truly possesses the potential to revolutionise digital commerce, both domestic and international.
The support provided by the government to the Indian start-up ecosystem has positioned the country as the third largest start-up ecosystem in the world, behind the US and China. Initiatives such as Fund of Funds Scheme (FFS), Self-Reliant India Fund, Startup India Seed Fund Scheme, Credit Guarantee Scheme for Startups, etc., have led to the start-up ecosystem flourishing.
The Small Industries Development Bank of India (Sidbi) was established under the Sidbi Act, 1989 to promote, finance, and develop the MSME sector. It operates schemes categorised into indirect finance and direct finance. Indirect finance includes assistance through banks and financial institutions, creating a multiplier effect on credit flow, while direct finance involves assistance through Sidbi’s network.
We are witnessing a point of inflection in lending towards the MSME sector. Technology has been the fulcrum in altering the perception towards financing MSMEs. However, the benefits are yet to be fully absorbed by the sector, particularly by the informal micro enterprises.
Improving access to finance for MSMEs will be key in enabling them to become the cornerstone of a $5-trillion economy. The ongoing digital revolution, along with the commitments of the government to enhance ease of doing business, shall be fundamental in channelising large-scale investments for economic development, of which the MSME sector will be one of the key beneficiaries. Towards this end, Sidbi stands committed to innovating and undertaking interventions to reach the last mile and support the sector that forms the bedrock of the nation. 
The author is Deputy MD at Sidbi. Views are personal
