India’s MSME market has seen tremendous growth and has become a source of pride over the years. It has generated high revenue, exports, and employment for the country. It strengthens the entrepreneurial spirit and opens up several opportunities for Indians. However, there are many financing challenges that prevent the sector from reaching its full potential. Due to the huge credit gap in the sector, the funds do not reach the MSMEs in time which puts many in deep trouble. Let’s discuss the top challenges faced by MSMEs in India.
Inadequate Financial Literacy
There is diversity in India’s MSMEs and it is a crucial strength but there is a lack of financial literacy. Many MSMEs are run by those who have no experience to make the right financial decisions. This causes them to make the wrong borrowing decisions with imbalanced working capital ratios. Some may end up with a low credit score or a high rate of interest on MSME loan. It is important to have financial literacy programs at the grassroots level.
Lack of Borrowing Options
Many MSMEs who do not have adequate borrowing options are left at the mercy of the outdated risk assessment process. They take a lot of time to assess the risk and release loans, making it difficult for MSMEs to capitalize on the business opportunities. A lot of lenders want a high credit score or ask for collateral for an MSME loan, which many borrowers do not have. They end up spending time and resources to meet the complex eligibility factors which leads to further delay in financing.
Inadequate Liquidity to Fund Operations
MSMEs have to handle the high inventory costs and most have no minimum order guarantees. Such situations can compel them to divert the finances towards working capital and leaves them cash strapped. In this case, they will look for the quickest funding solution to expand the business. MSMEs are always racing from one solution to another so they do not get the opportunity to achieve higher economies of scale and they remain underfunded. Inadequate liquidity can be enhanced with better financial awareness and right loan products that encourage better investments.
Lack of Modern Financial Regulations
One factor that hampers the growth of MSMEs is the regulatory practices that have been in existence for decades. The process of acquiring business licenses, certifications, and even conducting tax assessments is very complicated for MSMEs. There are schemes offered by the Government but the outdated technologies and lack of a skilled workforce prevent MSMEs from convincing lenders to source funds. As long as the regulations remain in the system, it will be difficult for MSMEs to achieve their targets.
One can never overlook the importance of MSMEs for the growth of the economy but sustainable and inclusive growth will only be possible when long-standing regulations change. Only when the credit financing gap is filled, the MSMEs across the country will see growth. Looking at the current situation, there remains plenty that must be done for MSMEs to make it easier for them to borrow funds without going through a tedious and stressful procedure.