For a small business, access to affordable capital at the right time is essential to accelerate their growth journey. Small and medium businesses (SMBs) need funds to invest in technology, expand operations and market reach, set up new premises, or hire top talent. SMEs contribute to 30% of India’s economic output, 32% to the country’s Gross Value Added (GVA), and also pave the way for industrialisation in rural and backward areas. Even then SME entrepreneurs find themselves in a tight corner when it comes to finding the required capital for these growth-led essential investments.
Today, India’s 51 million MSMEs are facing a credit shortfall of $400 billion losing out on growth opportunities. According to a study by the Asian Development Bank (ADB), one of the key reasons SMEs find it difficult to access cheap finance is because creditors lack clarity on the financial health of SMEs.
According to the Economic Survey 2017-18, data on credit disbursed by banks shows that out of a total outstanding credit of Rs 26,041 billion as in November 2017, 82.6% of the amount was lent to large enterprises and MSMEs got a paltry 17.4 % of total credit.
Credit Outsourcing to Industry (Rs. billions)
| End of Nov 16 | End of Nov 17 | Rate of Growth (percent) | |
| Industry (of which) | 25,793 | 26,041 | 1.0 |
| Micro & Small | 3,435 | 3,592 | 4.6 |
| Medium | 1,033 | 947 | -8.3 |
| Large | 21,325 | 21,502 | 0.8 |
Why the disbursement of credit is significant is because according to the National Sample Survey (NSS) (2015-16) there are 633.8 lakh unincorporated non-agriculture MSMEs that are also providing employment to 11.10 crore workers in the country, but the percentage or credit they receive is not commensurate. So, where should SMEs look for funds to give a much-needed boost to their business growth?
Banks – The process to get a loan from this traditional source of finance for SMEs remains cumbersome. While credit is available to SMEs via banks, they are at a disadvantage when compared to corporate borrowers – structural barriers in the system limit bank lending to this sector. However, as a sign of changing times, in 2018 the Government launched a new portal to fast-track loans of up to INR 1 crore for MSMEs wherein banks will digitally approve funding up to Rs 1 crore in 59 minutes upon submission of GST and income tax details. The disbursement will happen within eight days without SME entrepreneurs having to visit branches.
Alternate Lending Platforms and Peer-to-Peer (P2P) Lending – Many startups have launched technology-led solutions to meet credit needs of SMEs. There are 350+ alternative lending startups in India such as Lendingkart, InCred Finance, BankBazaar, and Kissht etc. Today Non-Banking Financial Companies (NBFCs) account for more than 16% of the credit extended to MSMEs and this number is projected to rise to 22-23% by March 2022.
Business Incubators, Accelerators, and Venture Capitalists – SMEs who are part of incubator and accelerator programs can approach them for funding options and connects with venture capitalists or angel investors. Venture capital is increasingly becoming a key source of SME financing. SIDBI alone has contributed to the corpus of 88 venture capital funds, investing more than $873 Mn in 472+ MSMEs.
Government Schemes – Recent government initiatives to provide financial aid to SMEs such as the Pradhan Mantra Mudra Yojana (PMMY), Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), etc. can be tapped into.
Crowd Funding – Crowd funding is gathering momentum in this space. SMEs can pitch their idea on portals like Angelpaisa, Lentra, Crowd invest, and Wealth book etc. and get investments from multiple individuals. A typical approach is to ask for pre-orders, donations, or equity based funding.
The bottom-line is that a credit information infrastructure could go a long way in solving Indian SMEs financing problems. SMEs need to make their business case, aggressively tap into emerging sources of funding, and put their business on the fast track to success!
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(Businesses with INR 25 Cr+ revenue and employee strength ≥ 100, intent to grow 10x and a commitment to learn can apply)
