msme loan

Top 5 Challenges Faced by MSME/SME Financing in India

The importance of Micro, Small, and Medium Enterprises (MSME) in a developing economy is well acknowledged. MSME loans cover a broad spectrum of business activities and employ a large number of people. They contribute significantly to the overall sustainability of growth and prosperity of a nation.

Why MSME Financing Is Tough?

Finances for MSMEs have been as tough an area as it is crucial for their success. Given the importance and prospects of MSME loans, eligibility for MSME loans is an area for both the government and the lending institutions to look into.

Despite all the efforts, the eligibility for MSME loans is still a work in progress and needs both clarities of policies and coverage of a larger section of the industry. It requires the business or enterprise to be small, micro, or medium in terms of capital and labor. The MSME loan eligibility requirement will also include collaterals.

All of these can be quite daunting for a new or small businessman.  

The importance of MSMEs in an economy is due to the diversity of business activities. They produce items and render services that go a long way in meeting the requirements of the nation. 

MSMEs will also produce components and accessories for use by large factories and industries. They are indispensable because they offer employment opportunities for unskilled and semi-skilled people who might otherwise not be able to find jobs.   

MSME Loan Path

You can apply for an MSME loan by visiting a lending institution physically or online. Alternatively, you can take the help of a finance agent.

Like any other loan, you will have to provide proof of identity, residence, and income.

To secure the loan, you will also need to provide collateral. The institution or the agent can help you choose the collateral. In most cases, it can be the assets of your existing business.

5 Challenges In MSME Financing

While there can be many challenges for an MSME to access finances, we talk about the top 5.   

  • Lack of financial literacy

In some cases, MSMEs are run by people with limited education or have limited bandwidth in terms of personnel or resources. It could prove to be a challenge to ensure compliance with the statutory requirements for a loan which includes the right knowledge and understanding of working capital ratio or the importance of credit score.

Due to these reasons, despite entrepreneurial capability, they might not be able to access the right financing option or the lender. 

  • Lack of ease of doing business

You will need a slew of licenses, approvals, and NOCs before you can set up a business. These may also need to be renewed periodically. Many of these papers are required as part of the eligibility for MSME loans. An MSME entrepreneur may not be able to prepare all these documents, especially during the early stages of the business. 

  • Lack of Trust in MSMEs

Since MSMEs can be an entirely new business by an entrepreneur whose credentials are not yet established, financial institutions such as non-banking financial companies (NBFCs) may show a lack of trust in extending loans.

Coupled with a lack of necessary documentation, it may make eligibility for MSME loans difficult.

  • Lack of quick access to credit 

A new business might need finances more urgently and may not be able to apply for an MSME loan and wait for weeks for its approval and disbursement. An early-stage business has many things to be taken care of, and all of them might need urgent attention. The financing procedures take time and it could be a detriment to the requirements of the enterprise.   

  • Lack of unsecured financing option

MSMEs are the results of exceptional entrepreneurial zeal and the grit of individuals. However, it could be difficult for them to arrange collaterals, even for small loans. 

Many times, these requirements may even look irrational. The need for collateral makes it hard for an MSME to access finance even though the business may be on a sound footing.  

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In Conclusion 

MSMEs provide a diverse range of products and services that people need. These enterprises help lower a nation’s dependence on imports for items of everyday use. Besides, MSMEs are the largest employer anywhere in the world, particularly for the unskilled and semi-skilled workforce. 

However, accessing credit for their working capital needs or expansion and growth can face many roadblocks. We have talked about 5 of them in this blog.

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