Catalysts of change: The rise of Indian MSMEs

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In the dynamic realm of India’s entrepreneurial landscape, a staggering 6 crore MSMEs flourish in diverse forms, each painting a distinctive canvas of ingenuity and innovation. From humble street vendors to powerful manufacturing entities with turnovers of up to INR 250 crore, they account for over a third of our nation’s GDP. Micro enterprises, comprising an impressive 99.47% of the MSMEs, are distributed across urban and rural areas, providing employment to an over 12 crore individuals. Based on Udyam registration data, out of the 65 lakh entities registered, the top sectors in this thriving domain are Food Products, Textile & Apparel, and Construction, each adding its unique imprint to the story of success. 

Indian MSMEs are transforming remarkably, shedding their earlier image of small-scale, labour-oriented, and conventional manufacturers. Embracing technology with fervour, they now stand as forward-looking and innovative enterprises. They are now venturing into innovative sectors like Drones, AI (Artificial Intelligence) initiatives, Precision Engineering, and High-tech products. Spearheaded by a new generation of entrepreneurs, this exciting shift bodes well for India’s future. While the journey towards widespread adoption of this trend is still unfolding, the early signals are undeniably encouraging. As a result, MSMEs are experiencing growth rates that far surpass the overall economic expansion. 

Recognising the importance of this sector, the Government of India has unveiled a host of initiatives aimed at bolstering skill development, marketing prowess, and financial support. The National Skill Development Corporation has fronted numerous impactful programs. Further, the dedicated Technology Centres and Development Institutes have lent vital support to R&D endeavours and market research, catering to the diverse needs of various industries. The Government e-Marketplace (GEM) has also emerged as a game-changer, empowering many MSMEs to display their offerings to government departments and enterprises with transparency. These strategic moves by the government echo their unwavering commitment to fostering a thriving ecosystem for our nation’s MSMEs. 

As for financial assistance, several schemes for loans, subsidies, and equity assistance that have been in vogue. The Government’s astute response to the Covid crisis came in the form of the Emergency Credit Line Guarantee Scheme (ECLGS), preventing large-scale MSME (Micro, Small, and Medium Enterprises) defaults. Priority sector lending for banks has ensured MSME loans remain at the forefront. NBFCs, have emerged as a formidable force in extending last-mile credit to MSMEs. Today, NBFCs account for 20% of the credit extended to MSMEs and a striking 70% of loans to New to Credit (NTC) borrowers, driving financial inclusion. Witnessing a remarkable surge, MSME credit growth exceeded 20% annually in recent years, with a phenomenal 50% growth over the five-year period ending in 2022, even amidst the impact of Covid. 

While these are impressive, the fact remains that 75% of MSMEs still need access to formal credit. Even for those with access, inadequate funding persists. The rate of non-performing loans has also been high, reflecting the need for adequate understanding and better underwriting of MSME risk. While lenders discover better underwriting methods, MSMEs can themselves, consider the following measures to improve their creditworthiness: 

  • Maintain proper books of account and pay taxes diligently: With the advent of GST and Aadhar-based identification, compliance is now rewarding and essential for businesses. 
  • Embrace transparency for better credit assessment: Demonstrating transparency to banks and NBFCs allows businesses to secure adequate funds for growth and potential external equity. 
  • Prioritise cash flow management: Poor liquidity poses a greater threat than a lack of profits. Leveraging platforms like TReDS for debt collection and invoice discounting significantly reduces working capital requirements, outweighing associated costs. 

In conclusion, India relies on the pivotal performance of the MSME sector to secure its position as the third-largest economy within the next 4-5 years. While various government schemes support them, the essence of growth and sustainability lies in the entrepreneur’s diligence, knowledge, and effective governance. This transformative force builds India’s growth story and sets the stage for a thriving India@100, where prosperity knows no bounds. 

(This article is authored by K V Srinivasan, Executive Director and CEO, Profectus Capital)

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