Link between labour productivity and access to formal credit for MSMEs IN INDIA

Abstract

Medium and Small Enterprises (MSMEs) in India are a vital engine of growth and employment. MSMEs have contributed 29.7% to GDP, 33.4% to total manufacturing output and 50% of India’s exports, all along with creating substantial employment opportunities in a country which has greater supply than demand of semi and un-skilled labour, generating employment for 120 million people. Not only have they helped become a significant growth and employment engine in the country, but they have also helped geographical distribution of output and wealth, with 60% of all MSMEs being housed in rural areas. Due to the critical role they play in wealth creation, and geographical distribution of wealth, it is imperative that they are supported to help build more fast-developing and urban employment centres and keep the pressure off the existing cities, which are anyways overburdened infrastructurally and in terms of population. One of the major constraints that MSMEs in India face is access to credit. MSME financing has been somewhat selective, with specific sectors and regions getting neglected. Setting up an MSME facility has been a challenge, with the availability of formal finance uncertain and firms opting to use their own capital or informal sources of funding in case of such uncertainty. Even in cases of availability of finance, the sufficiency of this facility has been limited, with entrepreneurs having to tap into friends and family, or other sources of fund their ventures. As a consequence, access to further lending for additional capital expenditure or working capital funding has also been a challenge. The financial sector in India has multiple participants, with large and few in number banks providing both deposit-taking and credit-providing facilities. Non-Banking Finance Companies (NBFCs), on the other hand, were the last-mile lenders, with their presence being in areas which were unserved or under-served by banks, as banks focused more on opening branches in the urban centres post liberalisation. Due to the banks’ focus on the urban centres, be it large corporates or prime and super-prime retail borrowers, it created a large space in the market where there were a large number of small borrowers, looking for finance and led to the rise of NBFCs in India. The country witnessed a spurt of MSME focussed NBFCs with regional operations, as MSMEs witnessed an increase in the availability of finance. This helped them grow and expand, improving productivity and exports. However, this availability was skewed towards specific geographies and sectors, driven by both regulatory focus on those sectors, as well as the geographical concentration of a larger number of borrowers made certain parts of the country more lucrative for NBFCs.