Bridging the MSME lending Gap in India Role & Initiatives from the Government


For entrepreneurs and business leaders, one of the factors that always drive the growth of the company is “finance.” There are also other factors for growth like risk management, operations, people, strategy, quality management, customer centricity, etc. which are also relevant.

However, there is no denying the fact that any business cannot grow quickly without sufficient funds. Financial backing is necessary at the right time for the establishment to carry out its day-to-day operations and purchase of fixed assets and working capital.

India’s growth in the economic sector has always been fueled by the Micro, Small, and Medium Enterprises (MSME) sector. According to the Indian Ministry of MSME’s Annual Report for FY18, there were a total of 63.3 million MSMEs in India. The MSME sector contributes to 30% of India’s GDP, with annual revenue up to INR 250 Cr.

Deepali Pant Joshi, Executive Director, Reserve Bank of India, said in an event has expressed her concern on the high employment elasticity in the sector that has reduced the potential of creating more jobs.

These MSMEs largely operate in the informal sector and comprise a large number of micro-enterprises and daily wage earners. One of the most critical issues that are faced by the MSMEs is their lack of compliance standards as most of these businesses are carried on the generation-wise basis. Due to this reason, they are hardly any documentation. This lack of documentation pushes them to local money lenders rather than any financial institution when there is a need for a loan. The traditional money lenders tie them up with the burden of high-interest costs, which on an average is 2.5 times higher than regular interest rates. They are not exposed to the financial strata of the country, thereby leading to insufficient credit history, which again becomes a significant reason for their loan denial from formal financiers.

Steps Initiated By the Government

The Government has established MSMEs as a priority sector. Banks are offered MSME lending targets. Banks are working on achieving these targets by reducing their operational costs.

Non-banking finance companies and banks are aware of the huge credit gap that is prevailing in the market. Still, they are trying to cover these gaps by adding several varieties of MSMEs in their client base.

The Government of India implemented Goods and Services Tax (GST), which has helped the MSMEs by introducing them to the formal business backdrop and getting them involved in the digital trails.

Budget 2019, focused mostly on MSMEs and an overview of that is listed below:

  • Corporate Tax was lowered to 25 % that extended to companies with annual turnover up to Rs 400 crore. The earlier capping was up to Rs 250 crore.


  • In FY 2019-20, 350 crores were allocated only for the MSME sector under the Interest Subvention Scheme. All GST registered MSMEs will have a subvention of 2%, which applies to new and incremental loans.


  • The Finance Minister said that the Indian Government would make a platform for the payments of MSMEs. This will promote the recording of receipts and payments. This will help dispose of postponements in payment and will boost up investment possibilities in MSMEs.Non-registered NBFCs will be brought to the TReDS platform, through an amendment in the Factoring Regulation Act, 2011. This is considered necessary, and the provision will be taken to allow all NBFCs to participate on the TReDS platform directly.


  • Pension benefit extended to about three crore retail traders and small shopkeepers whose annual turnover is less than Rs.1.5 crore. This is passed under a new Scheme Pradhan MantriKaram Yogi Maandhan Scheme.


  • The procedure of Enrolment into the Scheme will require Aadhaar and a bank account and self-declaration.


  • The Stand-up India Scheme is extended till 2025.


  • Modern technologies like Artificial Intelligence (AI), Internet of Things, Big Data, 3D Printing, Virtual Reality, and Robotics to be introduced to develop new-age skills.


  • In the pre-GST regime under the Service Tax and Excise, more than 3.75 lakh crore was blocked. The 2019 budget has proposed a resolution of the dispute with a scheme named SabkaVishwas Legacy Dispute Resolution Scheme. This will presumably give a quick closure to these litigations.


  • To ease the liquidity issues in NBFCs, the Government proposed that the fundamentally sound ones should get funds from mutual funds and banks and mutual funds. During the current financial year or the purchase of high-rated pooled assets of financially sound NBFCs. Total Rs 1 lakh crore, will be provided by the Government one time six months’ partial credit that will guarantee Public Sector Banks for first loss of up to 10%.


  • Micro, Small, and Medium Enterprises are emphasized on “Made in India.” This is one of the targeted areas of the Union Budget this year.


  • The Scheme of Fund for Upgradation and Regeneration of Traditional Industries’ (SFURTI) is focused on Bamboo, Honey, and Khadi clusters. During the year 2019-20, around 100 new clusters will be set up, enabling 50,000 artisans to join.


  • The Scheme for Promotion of Innovation, Rural Industry, and Entrepreneurship’ (ASPIRE) is focused on setting up of 20 Technology Business Incubators (TBI), 80 Livelihood Business Incubators (LBIs) in 2019-20 to develop 75,000 skilled entrepreneurs in agro-rural industry sectors.


  • For tax filing, there will be interchangeability of PAN and Aadhaar.


  • After 1 crore withdrawal, there will be a 2 % TDS per year


  • Businesses with an annual turnover of more than Rs. 50 crore can offer low-cost digital modes of payment. In this case, no MDR charges to be imposed on customers/ merchants.

Recent provisions like the implementation of small finance banks (SFBs) like Ujjivan, Equitas, AU, etc. is going to provide basic banking service in deposits and lending to sections of the society that is not being getting financial assistance from banks for their small business units, micro, and small industries and unorganized sector entities. These mainly comprise of small and marginal farmers.

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