MSMEs: The key driver fueling India’s economic growth

Ms. Anita Ananthan highlights the significant contribution of MSMEs in India’s growth narrative and the future it holds.

The Indian economy has been flourishing with a surge of energy, fueled by high expectations of India becoming the third most powerful nation to significantly impact global economic growth in the near future. The MSME sector is expected to contribute nearly 29% towards the growth of the Indian economy. The noteworthy contributions from the manufacturing and industrial sectors, as well as the creation of skills and employment opportunities in second-tier cities, reflect the government’s remarkable initiatives. During the pandemic, the government announced various relief packages to support the sustenance of MSMEs, meeting their operational liabilities and providing them with the necessary impetus to resume their businesses. Furthermore, the government has modified the threshold limit of MSMEs, making it possible for more units to enjoy the benefits and reliefs under this scheme.

Experts believe that the growth of MSMEs is critical to achieving India’s ambitious goal of becoming a $5 trillion economy by 2025. The Micro, Small, and Medium Enterprises (MSME) sector in India is involved in a variety of activities, including service, manufacturing, processing, production, and preservation of goods.

To support this sector, the Finance Ministry plans to inject ₹9,000 crore into the Credit Guarantee Fund Trust for Micro and Small Enterprises Credit Guarantee Scheme, effective from 1 April 2023. Additionally, the ministry will provide ₹2 lakh crore in collateral-free credit to MSMEs while simultaneously reducing credit costs by 1%.

Aside from the various benefits already available to MSMEs registered under the UDYAM scheme, I would like to highlight some additional advantages enjoyed by MSME units.

The timely collection of payments from clients or receivables has become a significant concern, particularly during and after the COVID pandemic. The MSME relief package mandates that all outstanding dues must be paid within 45 days of the payment’s due date for units registered under MSME. In addition, Section 16 of the Act holds the buyer/client responsible for paying interest, compounded monthly at three times the bank rate notified by the RBI, in case of delayed or non-payment to the supplier.

In case of disputes or non-payment, MSME has set up a grievance cell at https://samadhaan.msme.gov.in, where all claims can be registered. As of today, 134,250 cases have been registered, out of which 17% have been resolved, 9% mutually closed between parties, and 26% rejected.

In a bid to further support MSME units, the RBI has mandated banks to extend the Trade Receivables Discounting System to provide credit availability for procurement to vendors. This system ensures that collections are monitored and collected by the bank as and when they fall due, which not only makes credit available to vendors but also encourages greater discipline within corporates to pay their dues on time.

Banks are also required to refrain from accepting collateral security for loans up to ₹10 lakh extended to units in the MSE sector. Furthermore, as per the Master Direction on Lending to the MSME sector, a composite loan limit of ₹1 crore can be sanctioned by banks to enable MSME entrepreneurs to access their working capital and term loan requirements through a single window. To prevent delays in commercial production, banks that have sanctioned term loans singly or jointly must also sanction working capital (WC) limits singly (or jointly in the ratio of the term loan) to ensure that there are no cases where term loans have been sanctioned but working capital facilities are yet to be provided.

The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) was established by the Ministry of MSME and SIDBI to facilitate the flow of credit to the MSE sector, eliminating the need for collaterals or third-party guarantees. The scheme’s primary objective is to encourage lenders to prioritize project viability and secure credit facilities purely on the primary security of the assets financed. The Credit Guarantee scheme (CGS) aims to assure lenders that in case of MSE units that have received collateral-free credit facilities and fail to discharge their liabilities, the Guarantee Trust would make good the lender’s loss incurred as per the scheme.

The CGTMSE offers coverage for credit facilities up to ₹200 lakh extended by lending institutions without collateral security and/or third-party guarantees. To avail the guarantee cover, the CGTMSE charges a guarantee and annual service fee. For more details, you may visit www.cgtmse.in.

To support and guide the MSME sector, RBI has mandated banks to establish Rural Self Employment Training Institutes (RSET), which provide training, guidance, and skill sets to MSME enterprises. The training includes business planning, financial literacy, and consultancy support. Additionally, Certified Credit Counsellors offer professional consultancy and project reports to help MSME units and banks identify early signs of Depressed Loans before they turn into NPA.

The government’s efforts, such as setting up NITI Aayog and promoting internships and skill development for undergraduates and graduates, have expanded the spectrum of job opportunities across the country. This has not only created more opportunities transparently across all sectors and cities but has also played a significant role in supporting the MSME sector.

Ms. Ananthan is the Senior Vice President & Chief Financial Officer – Legal & Compliances, Credence Analytics. She is also the founder of ‘Club of Hope’, an NGO for kids and the old.

Disclaimer: Inputs have been taken from https://samadhaan.msme.gov.in, https://m.rbi.org.in. The opinions presented herein are solely those of the author and are not intended to endorse any particular institution. The author aims to disseminate information on the sector’s advancements and initiatives for the betterment of the community.

Edited by Shivani Srivastava, Senior Editor, CFO India