India’s MSMEs have long struggled to create the jobs that India needs. Less than 2% of India’s 6.3 crore MSMEs create more than 10 jobs and fewer than 20,000 companies have a paid up capital of more than 10 crores. Access to finance is a key lever to improve MSME productivity and help them scale. With timely and appropriate access to finance, MSMEs can better manage cash cycles, invest in machinery, skilled labour and more. The more MSMEs grow, the more likely they are to create good jobs.
Today, credit flow to MSMEs is quite stymied. The banking system finds the sector to be risky. Poor unit economics for banks (i.e. low ticket size loans) make it an unviable sector for banks. As a result, less than 15% of India’s MSMEs access formal low cost credit. Non Banking Finance Companies (NBFCs) and FinTech firms are filling this gap. However, regulatory issues combined with a few high profile bankruptcies among NBFCs (e.g. IL&FS and Dewan Housing) have resulted in low trust. As a result, NBFCs and FinTechs have high cost of funds (ultimate lending to MSMEs frequently crossed 25% p.a.) and much of the bank lending to them is concentrated – 80% of bank exposure to NBFCs is concentrated among 30 firms.
At GAME, we have brought together senior leaders and prominent banks and NBFCs to address this problem. We are developing new financing structures, forging new partnerships, building NBFC capacity, and crowding in new financiers to chip away at this very complex problem. More details can be found: www.massentrepreneurship.org/msme-finance