Indian MSME Sector Struggle in Economic Slowdown: Liquidity and Credit Crunch

Micro, Small and Medium Enterprises (MSME) sector contributes about 29% to India’s GDP. The MSME are the only solutions to the problem of unemployment in India since they employ about 60% of the Indian population. However, these promising enterprises are struggling due to economic slowdown.

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The MSME is divided into three categories based upon the money invested by the businessmen apart from infrastructures. The middle level enterprise belongs to category of investment about 5-10 crores, the small level falls in the category where the investment is 25 lakhs -1 crore and the micro level enterprise is the category where investment is 20 lakhs-5 lakhs.

Lack of Trust

MSME can approach banks and non-bank lenders to the restructure loans up to Rs 10,000 crores. But this not feasible for small and micro level enterprises. Most of the Public sector banks do not approve loans for smaller MSMEs. The credit worthiness of these small MSEMs are always put to question by these banks. They are required to produce various documents and the paperwork understanding is quite a tedious task for business persons of small MSMEs category.

Downfall of NBFCs in India

This is where Non-Banking Financial Company comes into picture. They provide loans to MSMEs in a much efficient and simpler ways. They require less documentation and have more transparency. The MSMEs faced a major setback when the major NBFC company, IL&FS infrastructural company collapsed after it changed some of its lending policies. This led to lack of confidence in the market by NBFCs and gave rise to liquidity crises in Jan 2019.

Since the NBFCs provided an efficient way for small MSME, the liquidity flow issues now trouble the people belonging to this category enterprise. It is difficult for small business persons to avail loans from government bank because of its complex and rigid procedure. Hence, it is not baffling that the RBI has 2.5% drop in MSMEs production.

PSB Loan in 59 Minutes

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Although the government has realized the importance of MSMEs in country’s economy and they came up with credit restructure scheme, they are not effective. The INR 1 crore in 59 minutes policy has its own loop holes. People can get the in-principle loan approval certificate easily by registering online and paying INR 1000 as their processing fees. Even after submission of all documents the managers of principal approved banks do not have power to issue loans up to a certain limit and your application is a waste of money and time. The process which follows involves same complexities of producing documents and other paperwork. PSB loan in 59 minutes is basically a lead generation platform for banks.

The MSMEs were struggling to cope up with the effects of demonetization, which caused a loss of credibility in small MSMEs and the haste implementation of GST, this liquidity crises has put a major setback to MSMEs. Banks do not prefer to lend these MSMEs on easier terms, and the credit restructure aren’t effective for small MSMEs, causing them to reach its lowest position ever.   

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