Major reforms for the MSME sector have taken place in the form of introduction of schemes which have benefitted the flow of credit to the sector Working with the assumption that all finance demand by the MSME sector is met by either formal or informal sources, the estimate for overall supply of finance to the MSME sector is INR 32.5 trillion ($650 billion).

1. MSME – Sector Overview
Part 1
Empowering MSMEs Role of Banks & Financial
Institutions, IT, Skill Development & Rating Agencies

2. MSME – Sector Overview
Indian economy is dominated by a vibrant set of enterprises, which are
prestigiously known as Micro, Small and Medium Enterprises (MSMEs) for
their scale of operations. The role of MSMEs in economic and social
development of country is widely acknowledged. They are nurseries for
entrepreneurship, often driven by individual creativity and innovation, and
make significant contribution to country’s GDP, manufacturing output, exports
and employment generation. The labour-capital ratio in MSMEs is much higher
than in larger industries. Moreover, MSMEs are better dispersed and are
important for achieving the national objective of growth with equity and
inclusion.

3. MSME – Sector Overview
Looking to the significance of SME sector, it is estimated that if India wishes to
have growth rate of 8-10% for the next couple of decades, it needs a strong
SME sector, without which it would be difficult to realize. In this backdrop,
MSME is considered to be fast growing sector of economy. The sector is
gaining more importance to realize theme of 12th Five Year Plan (2012-2017)
approach paper “faster, sustainable & more inclusive growth”. So, this sector
offers opportunities of entrepreneurship to younger generation, new areas of
MDPs for management institutes, business prospects to lending institutions,
issues to regulators & policy makers and areas of research to scholars for
making the sector more vibrant and faster.

4. MSME – Sector Overview
Today there are about 36 million MSMEs in the country and this sector has
shown an average growth of 18% over the last five years. However, only 1.5
million MSMEs are in registered segment while the remaining 24.5 million that
constitute 94% of the units are in unregistered segment. MSMEs are broadly
classified into two sector i.e. manufacturing and services. The units engaged in
manufacturing or producing and providing or rendering of services has been
defined as micro, small & medium under MSMED Act on basis of original
investment in plant & machinery and equipment.

5. MSME – Sector Overview
The latest 4th all India Census of MSME sector has revealed that of the total
working enterprises, 95.05% belong to micro enterprises, 4.74% to small
enterprises and balance 0.21% are medium enterprises. Also it is observed
that 45.38% enterprises are operating in rural areas. Though MSE sector,
micro in particular, is of great importance in respect to generating
employment and contributing inclusive growth of the economy, this segment
of industry is deeply credit constrained.

6. Role of Banks and Financial
Institutions in Financing MSMEs
The overall demand for finances in the MSME sector is estimated to be INR
32.5 trillion. The majority of these are in the form of debt. The demand for
debt varies among enterprises in the sector, with different expectations and
capabilities. The micro and small sub-segments together account for the
majority of the debt demand. As they mostly operate in industries such as
retail trade, repair and maintenance, restaurants and textiles and have a
significant demand for working capital. The average credit requirement for
Small enterprises is estimated to be INR 4-4.5 million and cash continues to
be a preferred form of transactions. Medium enterprises are more structured
and have a predictable demand for debt and prefer formal source of finance.
The average credit size is higher.

7. Overall Flow of Finance to the
MSME Sector
Major reforms for the MSME sector have taken place in the form of
introduction of schemes which have benefitted the flow of credit to the
sector Working with the assumption that all finance demand by the MSME
sector is met by either formal or informal sources, the estimate for overall
supply of finance to the MSME sector is INR 32.5 trillion ($650 billion). This
comprises informal finance, self-finance and finance from the formal financial
sector. However, what is characteristic of the finance flow is that informal
sources and self-finance together make up most of the finance channelled
into the sector. An estimated INR 25.5 trillion ($510 billion), or nearly 78
percent of the sector’s debt demand, is fed by these two sources, while
formal sources cater to just over 22 percent of the demand at INR 7 trillion
($140 billion).

8. Overall Flow of Finance to the
MSME Sector

9. Overall Flow of Finance to the
MSME Sector
Formal sources of finance, i.e. banks and non-banking institutions, account
for INR 6.97 trillion ($139.4 billion) of the overall formal finance supply, and
commercial banks are the largest formal sources of finance, primarily
providing debt capital to the MSMEs . The study estimates that the supply of
formal equity to the sector is INR 0.03 trillion ($0.6 billion) .The study
estimates that informal sources account for an estimated INR 24.4 trillion
($488 billion) in finance to the sector. Informal sources include both
institutional sources such as moneylenders and chit funds, and
noninstitutional sources such as family, friends, and family business. In
addition, entrepreneurs also leverage personal resources and contribute
equity to the enterprise. Self-equity contributions are estimated to account
for INR 1.1 trillion ($22 billion) of finance flow into the sector.

10. Flow of MSME Debt Finance from
the Formal Financial Sector
The MSME sector receives INR 6.97 trillion ($139.4 billion) debt from banking
and non-banking institutions. Banks and government financing agencies
constitute the largest share of formal debt to the MSME sector, and are
estimated to provide INR 6.4 trillion ($128 billion) to these enterprises. The
balance INR 0.57 trillion ($11.4 billion) of formal debt is supplied by non-
banking finance companies (NBFCs). Unlike in many developing countries in
Latin America where large banks are down-scaling to serve the Small and
Medium Enterprise (SME) market, in India large banks have been the largest
formal source of finance to MSMEs for decades. It is surprisingly noticed that
about 5% MSMEs have been covered by institutional funding given and
approximately 95% of units remains to be brought into banking fold

11. Flow of MSME Debt Finance from
the Formal Financial Sector

12. THANK YOU
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