A joint study by CRISIL and ASSOCHAM of 12,000 CRISIL rated micro enterprises, having a turnover of less than Rs 1 crore each, has found that access to institutional finance remains the biggest hurdle to growth for this segment.
With access to institutional finance for meeting working capital needs as low as 15%, a good 59% of the promoters relied heavily on own contribution and 26% on supplier credit, the study found.
Institutional finance accounted for only 7% of the working capital needs of those with a turnover of less than Rs 0.5 crore, which is the lowest in the entire micro and small enterprise (MSE) category.
All of this impacts the working capital cycle and profitability of micro enterprises, impacting their ability to upgrade infrastructure and technology, expand, or hire skilled workforce.
Business Head – CRISIL Ratings, SME, V Srinivasan said The time has come for concerted efforts by the government financial institutions and other stakeholders to improve the financial inclusion of micro enterprises by not just formulating the right policies and processes, but also ensuring relentless implementation. What also needs to be enhanced is the soft power potential of the sector to propagate financial literacy, awareness of government ”schemes and benefits, and technological skills.”
To be sure, schemes propagating financial inclusion have been implemented, such as the Pradhan Mantri Jan Dhan Yojana, which facilitates financial mainstreaming of individuals from low-income groups.
The Pradhan Mantri Mudra Yojana and the Mudra Bank, too, make way for institutional financing of MSEs.
The study showed credit flow to MSEs in 2014-15 was Rs 11.37 trillion, of which a lion’s share — of Rs 9.66 trillion — was through scheduled commercial banks. CRISIL estimates this Rs 11.37 trillion is only a quarter of the total funding demand of MSEs. The rest is met through informal sources, self-financing or remains unmet.
That means Rs 45 trillion would be the total credit demand in the MSE sector over the medium term, including Rs 5.15 trillion in the near-term. The calculation considers three major categories – term-finance, working capital finance, and non-fund limits for enterprises into manufacturing and trading.
MSEs, together with medium-sized enterprises, form the backbone of Indian industry, employing 80 million people the most after agriculture.
In the study sample of micro enterprises, the average number of employees per enterprise with less than Rs 0.5 crore turnover was 17, compared with 20 for an enterprise with turnover Rs 0.5-1 crore. This points to the large scope for employment in the sector.
It has been wonderful of late to see the sector driving innovation and process/product development in this age of e-commerce. Yet, MSEs tend to be overlooked by institutional finance, for reasons such as information asymmetry, lack of awareness and adequate financial infrastructure.
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