Finance Related Problems of MSME Sector

  • IASbaba
  • May 10, 2021
  • 0
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  • GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment. 
  • GS-2: Government policies and interventions for development in various sectors and issues arising out of their design and implementation. 

Finance Related Problems of MSME Sector

Context: According to the 2020-21 annual report of the Ministry of MSME, India’s 63 million micro, small and medium enterprises (MSMEs) contributed to 30% of the GDP

MSMEs also employ more than 100 million workers.

The sector’s finance-related problems are due to three main factors 

  1. Absence of viable credit providers
  2. Absence of credit products and schemes such as micro-insurance that help enterprises tide over business downturns
  3. Delayed payments leading to a persistent crunch in working capital. The average number of days it takes for enterprises to receive cash for the credit sale are 176, 112 and 81 days for micro, small and medium enterprises, respectively.

Delayed payments entail four kinds of costs for firms — 

  • Costs in retrieving payments in the form of personnel, time and effort; 
  • Interest forgone beyond the prescribed period; 
  • Business forgone due to working capital crunch; 
  • Losses due to non-reconciliation. 

Way Forward

  • Given the labour intensive nature of MSME sector, government should prioritise reviving the sector in its post-pandemic economic recovery strategy. 
  • In this context, government should increase institutional credit to the sector by expanding MUSRA scheme & pushing Small Finance Banks to perform its role.
  • While the government has taken steps to address the delayed payment problem through setting up the online Receivables Discounting System (TReDS) and MSME Samadhan, they have not been very effective.
  • Therefore, government should identify the weaknesses in its present MSME schemes so that they deliver to its fullest potential

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