MSME Financing in India

1. MSME Financing in India
MSME Development Fund workshop -
Organized by Central Bank of Nigeria/ Bankers Committee
March 18-20, 2015
Dr. Kamakhya Nr. Singh
kamakhya.singh@oba.co.uk
+234 (0)706 636 8219

2. Outline of the Presentation
• State of the Indian Economy
• Definition of MSMEs in India
• Role of MSMEs
• Challenges Faced by MSMEs
• Financing needs of MSMEs – Demand and Supply
• What has been done?
– Making the environment for MSMEs more enabling through improving
• Legal and Regulatory Framework
• Government Support
• Financial Infrastructure Support
– Schemes of financing MSMEs by Government of India
• What more can be done?
– Make the environment in which MSMEs operate more support-worthy through
• enabling infrastructure
• liquidity management
• and risk management
2

3. State of the Indian Economy
• Comparison of economic performance across different countries for the
year 2014-15, shows the emergence of India among the few large
economies with propitious economic outlook, amidst the mood of
pessimism and uncertainties that engulf a number of advanced and
emerging economies.
• Brighter prospects in India owe mainly to the fact that the economy stands
largely relieved of the vulnerabilities associated with an economic
slowdown, persistent inflation, elevated fiscal deficit, slackening domestic
demand, external account imbalances, and oscillating value of its currency.
(Source: The Economic Survey, 2014-15, Ministry of Finance, Government of India)
2

4. MSMEs – driver of growth
SMEs play a vital role for the growth of Indian
economy by contributing:
• 45% of the industrial output,
• 40% of exports,
• 42 million in employment,
• creating one million jobs every year and
• producing more than 8000 quality products for the
Indian and international markets
(http://www.smechamberofindia.com/rol_of_sme_sector.aspx)
2

5. MSMEs – driver of growth, contd..
The picture becomes more holistic with the
inclusion of microenterprises.
• There are 36.1 million (MSMEs) which contribute 37.5 per
cent of the country’s GDP playing a critical role in boosting
industrial growth and economic development (Economic
Survey, 2014-15)
• Although 94 percent of MSMEs are unregistered1*, the
contribution of the sector to India’s GDP has been growing
consistently at 11.5 percent a year, which is higher than the
overall GDP growth rate of India (IFC report, 2013)
(1*) Unregistered Enterprises: MSMEs that do not file business information with District Industry Centers (DICs) of the State/
Union Territory; The data on enterprise output performance is not adequately tracked by the government agencies
2

6. Definitions of Micro, Small &
Medium Enterprises
In accordance with the provision of Micro, Small
& Medium Enterprises Development (MSMED)
Act, 2006 the Micro, Small and Medium
Enterprises (MSME) are classified in two Classes:
(a) Manufacturing Enterprises
(b) Service Enterprises
2

7. Manufacturing and Service
Enterprises
• Manufacturing Enterprises are those enterprises which are
engaged in the manufacture or production of goods pertaining to any
industry specified in the first schedule to the industries (Development and
regulation) Act, 1951) or employing plant and machinery in the process of
value addition to the final product having a distinct name or character or
use. The Manufacturing Enterprises are defined in terms of investment in
Plant & Machinery.
• Service Enterprises are those enterprises that are engaged in
providing or rendering of services and are defined in terms of investment
in equipment.
2

8. Investment Limit for MSMEs
The limit for investment in plant and machinery / equipment for manufacturing /
service enterprises, as notified, vide S.O. 1642(E) dtd.29-09-2006 are as under:
2
Manufacturing Sector
Enterprises Investment in plant & machinery ‘@ 1 USD = 60 Rupees
Micro Enterprises Does not exceed twenty five lakh rupees < 41667
Small Enterprises More than twenty five lakh rupees but does
not exceed five crore rupees
41667-833333
Medium Enterprises More than five crore rupees but does not
exceed ten crore rupees
833333-1666667
Service Sector
Enterprises Investment in equipments
Micro Enterprises Does not exceed ten lakh rupees: < 16667
Small Enterprises More than ten lakh rupees but does not
exceed two crore rupees
16667-333333
Medium Enterprises More than two crore rupees but does not
exceed five core rupees
333333-833333

9. Sub-segments of the Manufacturing and
Services Sectors
Source: MSME Census
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10. Stakeholders
2
Stake in the
Development of
MSMEs
Regulators/
Government
Social Groups/
Environmental
Groups and
Public in general
Communities,
where MSME
operates
Business Partners,
suppliers, vendors
Employees
and
Promoters
Lenders and
Investors
Clients/
Customers
Industry
peers
Given the significant role played by MSMEs in economy and society, it’s important for all the
stakeholders of MSME development to help the MSMEs meet the challenges faced by them.

11. Distribution of Enterprises in the MSME Sector
and Prevalent Ownership Structures
2
Percentage (%) represent the distribution of MSMEs on the bases of ownership structure

12. Challenges faced by MSMEs
2
Challenges faced by MSMEs can be analyzed by looking at the Value Chain, as shown
above, of a typical MSME

13. Challenges faced by MSMEs
Value Chain analysis on the previous slide shows the major
challenges faced by MSMEs. These challenges are related with:
Inputs:
• Raw material – quantity, quality, price
• Technology
• Management skills
• Human Resources
• Finance
Output:
• Quality of product
• Marketing of finished product – market linkages
2

14. Challenges faced by MSMEs
While poor infrastructure, lack of other inputs and inadequate
market linkages are key factors that have constrained growth of
the sector, it is the lack of adequate and timely access to finance
that has been the one of the biggest challenges.
The financing needs of the sector depend on the size of
operation, industry, customer segment, and stage of
development.
Financial institutions have limited their exposure to the sector
due to a higher risk perception and limited access of MSMEs to
immovable collateral.
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15. Sources of finance
Broadly, of the overall finance demand of INR
32.5 trillion($650 billion) (as estimated by IFC report, 2013)
- 78 percent, or INR 25.5 trillion ($510 billion) is either
self-financed or from informal sources
- 22 percent or INR 7 trillion ($140 billion) of the total
MSME financing is from formal sources
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16. Sources of finance, contd…
Within the formal financial sector
- Banks account for nearly 85 percent of debt supply to the
MSME sector, with Scheduled Commercial Banks comprising
INR 5.9 Trillion (USD 118 Billion).
- Non-Banking Finance Companies and smaller banks such as
Regional Rural Banks (RRBs), Urban Cooperative Banks (UCBs)
and government financial institutions (including State
Financial Corporation and State Industrial Development
Corporations) constitute the rest of the formal MSME debt
flow.
2

17. MSME Finance Demand Flowchart
2

18. Nature of Finance – as Demanded by MSMEs
(in INR Trillion – US$ billion in bracket)
Exclusions from Overall Debt Demand
Type of enterprises Share of debt demand (in %)
Sick enterprises in default 13
New enterprises with less than one year of
operations
23
Portion of enterprises rejected by formal
financial institutions
1
Voluntary exclusions of micro services
sector enterprise segment
25
Total 62

19. Overall Finance Gap in MSME Sector
(In INR trillion* – figure in brackets is in US$ billion)
2

20. What has the Government done ?
Enabling Environment for Growth of Finance
in the MSME Sector
• MSMEs function in a highly competitive environment and
require an enabling environment to sustain growth.
• Well - rounded fiscal support, a strong policy framework, and
incentives promoting innovation by financial institutions can
significantly increase the penetration of formal financial
services to the MSME sector.
• The three main pillars around which the government has
worked for creating enabling environment for MSMEs are:
(a) legal and regulatory framework
(b) government support
(c) financial infrastructure support.
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21. Pillars of the enabling environment
(Schematic diagram of Key Elements of the Enabling Environment)
Source: IFC-Intellecap Analysis
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22. MSME Schemes (Government of India, 2015)
Various Ministries of Government of India have a
number of schemes for the development, promotion
and finance of MSMEs.
Providing financial infrastructure support to MSMEs is
one of the most important means of development and
growth of those MSMEs.
Details of the schemes (exisiting in the first quarter of
2015) for promoting the development and growth of
MSMEs can be found at –
http://msme.gov.in/web/portal/Scheme-Msme.aspx
2

23. MSME Schemes (Government of India, 2015)
A few of the schemes promoted by Ministry Of MSMEs are as under:
• Development Commissioner (DC-MSME) Schemes
1. Credit Guarantee 2. Credit Linked Capital Subsidy for Technologny Upgradation
3. ISO 9000/ISO 14001 Certification Reimbursement 4. Micro & Small Enterprises Cluster Development
Programme
5. Micro Finance Programme 6. MSME Market Development Assistance (MDA)
• NSIC Schemes
1. Performance and Credit Rating 2. Bank Credit Facilitation
3. Raw Material Assistance 4. Single Point Registration
5. Infomediary Services 6. Marketing Intelligence Services Lease
7. Bill Discounting
• ARI Division Scheme
1. Prime Minister Employment Generation Programme (PMEGP)
2. Janshree Bima Yojana for Khadi Artisans 3. Market Development Assistance (MDA)
4. R&D Activities of Coir Board Under Central Sector Plan of Science & Technology (S&T)
5. Rejuvenation, Modernisation and Technology Upgradation of Coir Industry (REMOT)
6. CSS of Export Market Promotion
2

24. MSME Schemes (Government of India, 2015)
A few of the schemes promoted by Ministry Of Finance are as under:
• SIDBI Schemes
1. Growth Capital and Equity Assistance 2. Refinance for Small Road Transport Operators
3. General Refinance (GR) 4. Refinance for Textile Industry under Technology Upgradation Fund
5. Acquisition of ISO Series Certification by MSE Units 6. Composite Loan
7. Single Window (SW) 8. Rehabilitation of Sick Industrial Units 9. Development of Industrial Infrastructure for
MSME Sector 10. Integrated Infrastructural Development (IID) 11. Bills Re-Discounting Equipment
12. Bills Re-Discounting-Equipment(Inland Supply Bills) 13. Direct Finance (Project Finance, Equipment Finance,
etc.)
• NABARD Schemes
1. Producers Organisations Development Fund 2. Dairy Venture Capital Fund
3. Establishing “Poultry Estates” and Mother Units for Rural Backyard Poultry
4. Establishment/Modernisation of Rural Slaughter Houses
5. Commercial Production Units of Organic Inputs 6. Poultry Venture Capital Fund
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25. Way Forward…
• It’s not only the Ministry of MSME and Ministry of Finance
that have the schemes for the development, promotion and
finance of MSMEs
• Others such as Ministry of Agriculture, Ministry of Commerce
and Industry, Ministry of Communication and IT, Ministry of
Food Processing Industries, Ministry of Rural Development,
Ministry of Science and Technology, Ministry of Textile, etc.
also have targeted schemes for MSMEs.
• Stakeholders need to be doing more so that the financial
access for MSMEs becomes better, more efficient and less
costly,
2

26. Potential interventions to increase
access to Finance for the MSMEs
Given the significance of MSME sector, there is still requirement
for additional intervention to be made and action to be taken for
unleashing the full potential of the MSME sector.
Potential interventions that can be undertaken to expand the
access to MSME finance in India are:
• enabling infrastructure
• liquidity management
• and risk management
2

27. Potential interventions contd..-
Enabling infrastructure
• Encourage securitization of trade-receivables in the sector
through conducive legal infrastructure.
• Promote institutions to syndicate finance and provide advisory
support to MSMEs in rural and semi-urban areas.
• Incentivize formation of new MSME-specific venture funds by
allowing existing government equity funds to make anchor
investment in venture funds.
2

28. Potential interventions contd..-
Liquidity management
• Improve debt access to non-banking finance companies
focused on these enterprises and provide regulatory incentives
for participation in the sector.
• Develop an IT-enabled platform to track MSME receivables to
facilitate securitization of these trade receivables, or
alternatively expand the scope of SIDBI and NSE’s IT-platform
NTREES to facilitate securitization.
• Provide credit guarantee support for MSME finance to non-
banking finance companies.
2

29. Potential interventions contd..-
Risk management
• Develop a better understanding of financing patterns of service
enterprises in the sector.
• Expand the scope of the sector’s credit information bureau to
collate and process important transaction data, including utility
bill payment.
• Strengthen the recently established collateral registry and
create stronger linkages with other financial infrastructure.
• Facilitate greater debt access to non-banking finance
companies.
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30. 30
Thank you!
Dr. Kamakhya Nr. Singh
CFO, LAPO MF Bank
Project Manager, UNDP (AMSCO)
http://ng.linkedin.com/in/kamakhyasingh/
This presentation has, apart from using various secondary sources, also used the paper “Micro, Small and
Medium Enterprise Finance in India: prepared by IFC in association with the Government of Japan in 2012.