This new initiative seeks to bridge this gap and stimulate job creation and economic activity by providing MSMEs with much-needed financial support.

The government plans to set up a dedicated bank for direct lending to Micro, Small and Medium Enterprises (MSMEs) to increase credit availability in this important sector. The industry has called for increased financial support, as existing institutions such as the Small Industries Development Bank of India (SIDBI) mainly focus on refinancing loans rather than providing direct funding. In contrast, State Finance and Industrial Development Corporations lend directly to MSMEs.

However, many, such as Punjab State Industrial Development Corporation (PSIDC) and Punjab Finance Corporation (PFC), are facing shortage of funds and have stopped credit flow. PSIDC accumulated liabilities of Rs 4,700 crore, so has not given any new loan to any company for the last 16 years. According to a report by Ernst & Young (EY), MSME credit penetration in India is only 14 percent, which is significantly lower than that of major economies like the US and China, where the figures are 50 percent and 37 percent, respectively. There are percentages. Indian MSMEs facing acute credit crunch? 25 trillion, indicating a largely untapped credit market. Increased lending to MSMEs can stimulate economic activity and create jobs. The proposed establishment of a separate bank dedicated to the MSME sector will help address these direct credit shortfalls. However, the government needs to finalize various details, such as the ownership structure of the bank, which could adopt a hybrid public-private partnership model. Although major banks operate in this sector, they often struggle to meet the unique needs of MSMEs.

European countries provide valuable lessons by grouping MSMEs with home loan consumers, both considered small borrowers. If the government does not set up a new bank, SIDBI can be transformed into a full-fledged bank focused on direct lending to MSMEs rather than mere refinancing. SIDBI plays an important role in financing India’s MSMEs and is owned by a consortium comprising the government and major financial institutions. In 2023-24, the National Bank for Agriculture and Rural Development (NABARD) supported the agriculture sector with a loan portfolio of Rs 6.68 lakh crore, with the agriculture sector accounting for 18 percent of the country’s GDP. On the other hand, SIDBI had a refinancing loan portfolio? 84,000 crore in FY 2023-24, with the MSME sector accounting for 30 percent of the GDP.

The Reserve Bank of India (RBI) has designated MSMEs as a priority sector and directed banks to allocate 40 percent of Adjusted Net Bank Credit (ANBC) to priority sectors including MSMEs. However, a study by RBI found that most banks do not exceed 25 percent for MSME credit. SIDBI’s future growth depends on how effectively commercial banks meet their priority sector lending targets. An ICRA report warned that if banks successfully meet their quotas, the need for SIDBI’s refinancing services may decrease. Challenges: Despite MSMEs playing an important role in the country’s economy, access to adequate, timely, and low-cost finance remains a critical issue. A major obstacle to the growth prospects of the sector. Limited credit history, insufficient collateral, lack of information about government support, and high borrowing costs complicate access to funding for MSMEs. Unlike large corporations, MSMEs often lack a track record, making it difficult to get loans from banks and other financial institutions.

There are 64 million MSMEs in India, 99 percent of which are classified as micro-enterprises. Despite global headwinds, the sector has helped cushion the economy from shocks. In a country marked by a marked disparity between urban and rural areas, MSMEs contribute to the development of less developed areas, thereby reducing regional imbalances and inequalities. The sector provides more than 110 million jobs, accounting for 23 percent of the country’s labor force, making it the second largest employer in India after agriculture.

The importance of MSMEs in the Indian economy cannot be overestimated. They generate innovation, generate employment, and contribute significantly to exports and GDP. By promoting entrepreneurship and supporting large-scale industrialization, MSMEs play an important role in reducing regional imbalances, development of economically weaker sections and stimulating socio-economic development.

Their adaptability and resilience make them indispensable in the face of economic hardship, ensuring the continued dynamism of the Indian economy. With 27 percent of India’s GDP, 38.4 percent of total manufacturing output, and 45 percent of the country’s total exports, the MSME sector serves as the backbone of the economy.

Global models to emulate:

However, the government has launched several initiatives to promote financing for micro, small and medium enterprises (MSMEs), including the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), the Pradhan Mantri Mudra Yojana (PMMY), and Stand up. India Although these efforts are laudable, the government should ensure awareness and effective distribution of these schemes so that more entrepreneurs can benefit. Additionally, the private sector needs to expand and promote MSME financing.

Without public-private partnership, unity and cooperation, MSME financing will face challenges. A key issue is the introduction of interest concessions, ranging from 10 to 12 percent, to address high borrowing costs. This creates an uneven playing field compared to countries like China, where the borrowing rate is 3.1 percent, the US at 4.37 percent, and the European Union, which averages 5.1 percent for MSMEs.

In the US, MSMEs can access funding through various federal and state programs. The Small Business Administration (SBA) is important by offering loan guarantees and encouraging banks and other financial institutions to make loans to small businesses. plays a role. Microloan programs provide capital for a variety of business needs, including working capital, equipment purchases, and real estate acquisitions. Additionally, the US government supports MSMEs through grants, venture capital initiatives, and state-specific funding programs tailored to local business climates. is This diverse range of financial products ensures that MSMEs can find suitable funding options for their specific needs.

In EU countries, MSMEs benefit from a strong financial support framework provided by institutions such as the European Investment Bank (EIB) and the European Investment Fund (EIF). These institutions provide funding through intermediaries such as banks and microfinance institutions, offering loans, guarantees and equity financing. The EU also promotes MSME funding through programs focused on entrepreneurship and the competitiveness of small and medium-sized enterprises, which emphasize innovation and competitiveness. China Development Bank, which provides targeted lending. Local governments have also established credit guarantee funds. Additionally, China’s financial technology sector has developed significantly, with online lending platforms and digital financial services providing alternative sources of funding for MSMEs.

Way Forward: The inherent challenges faced by MSMEs cannot be ignored. It is important to address the issues within the MSME sector that hinder access to finance. As recommended by the Parliamentary Committee on Finance, a comprehensive approach in the US, EU and China is needed for India to expand its financing landscape for MSMEs, improve access to credit, and facilitate these enterprises. Serves as a valuable model for becoming globally competitive.

The government also proposed to set up Merchant Credit Card (MCC) scheme for traders and Vaiper Credit Card (VCC) for micro units similar to Kisan Credit Card (KCC). A scheme to provide short-term loans with subsidized interest, under the Credit Guarantee Fund, is still awaited. Much work remains to be done to ensure that all MSMEs can access affordable and timely financing.

(Writer Sonalika is Vice-Chairman of ITL Group, Vice-Chairman of Punjab Economic Policy and Planning Board, Chairman of Associam Northern Region Development Council and President of Tractor and Mechanization Association. Expressions are personal)