• MSME in India

MSME (Micro, Small and Medium Enterprises) plays a vital role in supporting the Indian economy. MSMEs contribute around 30% to India’s GDP, making them a significant driver of economic growth. MSMEs contribute approximately 40% of India’s total exports, promoting global trade. They employ a large number of people, especially in rural areas, contributing to employment generation. They foster innovation and entrepreneurship, leading to the development of new products and services. MSMEs contribute to a more equitable distribution of wealth and resources across the country.

Micro, Small, and Medium Enterprises (MSMEs) have emerged as the backbone of India’s economy, playing a pivotal role in driving growth, employment, and innovation. These enterprises, often family-owned or startups, contribute significantly to the nation’s Gross Domestic Product (GDP), manufacturing output, and exports.

Our newsletter is an attemppt to provide brief about the developments in MSME Sector on weekly basis.

  • Our Special Corner
  • “State govt fails to use central funds for MSME development”

Although Gujarat is a leader in micro, small and medium enterprises (MSMEs), the state govt has failed to use central govt’s grants for the development of the sector, according to govt data. As of June 30, 2024, Gujarat received a grant of Rs 5 crore for preparing a Strategic Investment Plan (SIP) and a grant of Rs 47.06 crore under the Raising and Accelerating MSME Performance (RAMP) programme of the Union govt. The programme is being implemented by the Union ministry of micro, small and medium enterprises (MoMSME).

SIP and RAMP were launched by the PM on June 30, 2022, to be implemented over a five-year period from 2022-23 to 2026-27.

According to GOI data, Gujarat used just 0.66 crore of the allocated Rs 5 crore to prepare the SIP and has not used any money from Rs 47.06 crore for projects under RAMP.

Sources in the state govt said the process of SIP preparations is ongoing and the govt aims to expedite the implementation of the scheme.

SIP scheme aims to scale up the implementation capacity and coverage of MSMEs by enhancing the existing schemes with focus on innovation, ideation and improving practices and processes. The scheme also aims at improving market access, promoting greening initiatives and scaling up guarantees to women-owned micro and small enterprises.

  • MSME Schemes:

The government has introduced many schemes to encourage the micro and small industries. Through many schemes, the Central government is boosting the credit availability for the MSMEs. MSME (Micro, Small and Medium Enterprises) schemes are initiatives launched by the Government of India to support and promote the growth and development of small businesses in the country.

  • “Dedicated bank for MSMEs to boost credit access”

Dedicated bank for MSMEs to boost credit access

This new initiative seeks to bridge that gap and stimulate job creation and economic activity by providing MSMEs with the financial support they desperately need

The government plans to establish a dedicated bank to lend directly to Micro, Small and Medium Enterprises (MSMEs) to enhance credit availability in this crucial sector. The industry has called for increased financial support, as current institutions like the Small Industries Development Bank of India (SIDBI) primarily focus on refinancing loans rather than providing direct funding. In contrast, state financial and industrial development corporations do lend directly to MSMEs.

However, many, such as the Punjab State Industrial Development Corporation (PSIDC) and Punjab Finance Corporation (PFC), are experiencing funds crunch and have stopped credit flow. PSIDC gathered liabilities worth Rs 4700 crore, therefore, has not given any fresh loans to any company for the last 16 years. According to an Ernst&Young(EY) report, MSME credit penetration in India is only 14 per cent, significantly lower than in larger economies like the US and China, where the figures are 50 per cent and 37 per cent, respectively. Indian MSMEs face a critical credit shortage of? 25 trillion, indicating a substantial untapped credit market. Increasing lending to MSMEs can stimulate economic activity and create jobs. The proposed establishment of a separate bank dedicated to the MSME sector would help address these direct credit shortages. However, the government needs to finalise various details, such as the bank’s ownership structure, which may adopt a hybrid public-private partnership model. Although large banks operate in the sector, they often struggle to meet the unique needs of MSMEs.

The Reserve Bank of India (RBI) has designated MSMEs as a priority sector and directed banks to allocate 40 per cent of the Adjusted Net Bank Credit (ANBC) to priority sectors, including MSMEs. However, a study by the RBI has found that most banks do not exceed 25 per cent for MSME credit. SIDBI’s future growth depends on how effectively commercial banks fulfil their priority sector lending targets. A report by ICRA warns that if banks successfully meet their quotas, there could be a reduced need for SIDBI’s refinancing services.Challenges: Despite the vital role MSMEs play in the country’s economy, access to adequate, timely, and low-cost finance poses a significant hurdle to the sector’s growth prospects. Limited credit history, insufficient collateral, lack of knowledge about government support, and high borrowing costs complicate access to funding for MSMEs. Unlike large corporations, MSMEs often lack an established track record, making it challenging to secure loans from banks and other financial institutions.

  • “SBI plans to enhance threshold limit under instant loan scheme for MSME sector

To ensure easy and adequate credit availability to the MSME sector, the State Bank of India (SBI) is planning to enhance the threshold under the instant loan scheme from the existing Rs 5 crore. ‘MSME Sahaj – End to End Digital Invoice Financing’, provides solutions ranging from applying for the loan, documentation and disbursement of the sanctioned loan within 15 minutes, without any manual intervention.

Simplification of the MSME credit is something that the bank is emphasising on and making lending cash flow based backed by the CGTMSE guarantee, he said.

This reduces the need for collateral, which would enable a lot of people to come into the formal MSME borrowing system, he said. “We still have a large number of MSME customers accessing the informal credit. We would like to bring them to the banking fold,” he said.

As far as network expansion is concerned, Setty said SBI is planning to open 600 branches across the country in the current financial year. SBI has a network of 22,542 branches across the country as of March 2024. Source: Click Here

For eligibility, application process and other process, please get in touch with us.

  • Trade Receivables Discounting System (TReDS) – Part 54

Trade Receivables electronic Discounting System (TReDS) is an online electronic platform and an institutional mechanism for factoring of trade receivables of MSME sellers. It enables discounting of invoices through an auction mechanism to ensure prompt realization of trade receivables.  

The Trade Receivables electronic Discounting System (TReDS) was released by the Reserve Bank of India in 2018 to help small businesses resolve cash flow issues.

How TReDS is revolutionising payments for MSMEs in India

A new online system is helping small businesses in India get paid faster, according to the Reserve Bank of India (RBI). The system, called TReDS, allows small businesses to sell unpaid invoices to banks and other financial institutions.

“TReDS has effectively bridged the credit gap by enabling MSMEs to promptly convert their trade receivables into liquid funds. This ensures that small businesses do not have to wait endlessly for payments,” said RBI Deputy Governor Michael Patra.

Small businesses often struggle to get paid on time by their larger customers. This delay can make it hard for them to pay their own bills and grow their businesses.

TReDS helps solve this problem by giving small businesses quick access to cash. This allows them to continue operating and investing in their growth.

The system has been a success, with the value of invoices financed through TReDS increasing significantly. The RBI also reports that around 5,000 financial technology companies are now using TReDS to help businesses manage their finances.

  • MSME Corporate News:
  1. Finance ministry likely to launch digital credit assessment model for MSMEs in December

The finance ministry will in December launch a credit assessment model for Micro, Small, and Medium Enterprises (MSMEs) to simplify loan access by leveraging digital footprints, a government official has said. The initiative, announced in the Budget 2024, promises to replace traditional credit assessment mechanisms with a data-driven approach and help smaller MSMEs, which are often ignored due to lack of formal documents, to get loans easily.

The guidelines were ready and and finance minister Nirmala Sitharaman would likely unveil the initiative. The model captures MSMEs’ digital footprints to assess their creditworthiness, moving away from the requirement of external ratings, which would help save costs for MSMEs, the official said.         

Digital footprints refer to data trails created through online activities. For MSMEs, this includes business-related transactions such as employee salary payments, utility bills, bank transactions, and contributions towards provident fund (PF) and the National Pension Scheme (NPS).

According to Reserve Bank of India (RBI) data, the number of accounts and amount outstanding to MSME sector by scheduled commercial banks in 2022-23 was 213.32 lakh and Rs 22.6 lakh crore respectively.

The expert committee on MSMEs, constituted by the Reserve Bank in 2019, estimates the credit gap in MSME sector to be in the range of Rs 20 to 25 lakh crore.

Bridging the gap

The new model aims to address challenges faced by smaller MSMEs, which are often overlooked due to inadequate formal documentation.

“Even if an MSME employs just 10 people, paying salaries and PF generates valuable data. This can be used to assess its creditworthiness. Current guidelines don’t permit this, but they will be updated to reflect these changes,” another official said.

Traditionally, banks have treated MSMEs as corporates, using assessment guidelines that favour larger enterprises. The digital credit assessment model seeks to bridge this gap by focusing on smaller businesses.

The initiative is expected to reduce the burden on MSMEs of obtaining external ratings, which is mandatory for loans exceeding Rs 30-50 crore and sometimes even for smaller amounts.

Integrated with the Credit Guarantee Scheme

The Rs 100-crore Credit Guarantee Scheme for MSMEs, announced in the Budget, will be operationalised through the new model.

The scheme allows MSMEs to secure loans without third-party guarantees or collateral. It also extends beyond working capital, enabling MSMEs to access term loans for plant and machinery.

The initiative, announced in the Budget, promises to help smaller MSMEs, which are often ignored due to lack of formal documents, to get loans easily.

  • (To read more – Click Here)
  • PSBs set to launch MSME credit model this month, reveals document

Initially, nine PSBs such as Bank of Baroda, Canara Bank, Bank of Maharashtra and others will allow loans only up to Rs 25 lakh. Bank of India will offer loans up to Rs 1 crore

Amid directions from the finance ministry, most public sector banks (PSBs) are ready to launch the credit risk assessment model for micro, small and medium enterprises (MSMEs), with a loan amount between Rs 25 lakh and Rs 5 crore to be assessed by the model for different banks, according to an internal government document reviewed by Business Standard.

Bank of India, Punjab & Sind Bank, Canara Bank and Indian Bank are planning to launch this model on November 25.

Six other PSBs, including Bank of Baroda (BoB), Union Bank of India, UCO Bank, Central Bank of India, Indian Overseas Bank. Read more – Click Here

  • Work begins on credit index for MSMEs to boost funding

The government has begun discussions with stakeholders, including banks and regulators, to develop a ‘Creditworthiness Index’ as part of its push to improve credit access for micro and small businesses.

The proposed index will rate companies across industries using common parameters, helping lenders evaluate borrowers with weak financials, limited documentation, or minimal transaction history, multiple people aware of the development told ET.

The Indian government is developing a ‘Creditworthiness Index’ to improve credit access for micro and small businesses. The index will rate companies across industries using common parameters, assisting lenders in evaluating borrowers with limited financial history. This initiative is part of a larger plan to enhance credit access and support MSME growth.

  • Why MSMEs should prioritise cybersecurity, financial stability, employee management

India’s MSMEs are expanding their presence and are playing a critical role in the country’s economic growth. But the sector still battles challenges in cybersecurity, supply chain and cash flow, and there is an urgent need for MSMEs to prioritise investments in these critical areas.

Focusing on these areas would help businesses stay resilient and build trust with employees, customers and partners, says Sajja Praveen Chowdary, Head, Policybazaar for Business. “The year 2024 taught us that preparation isn’t optional but essential. Cybersecurity is one area that’s become a priority, with businesses needing not just stronger systems but also support like cyber insurance to bounce back from incidents quickly. Financial stability is another priority; in fact, 40% of Indian MSMEs experience delays in payments, which can destabilise operations. Trade credit insurance helps ease the disruptions,” he explains. (To read more – Click Here)

He has contributed in ICAI, ICSI and MCCI and other various Newsletters. He is also a speaker at various platforms including seminars / webinars.