$400 bn shortfall in MSME funding: IFC

Formal sources are able to channel only $140 bn; the study says banks can address the sector's debt and equity financing requirement of $70 bn

 

IFC, a member of the World Bank group, has released a new study that found financial institutions met only one-fourth of the demand for finance of micro, small and medium enterprises (MSMEs) in India. It noted that a sizeable part of this unfulfilled opportunity is viable.

The study estimates the overall financial shortfall for MSMEs at over $400 billion. Formal sources are able to channel only $140 billion. Banks can address the sector's debt and equity financing requirement of over $70 billion, it estimates.

The study, 'Micro, Small and Medium Enterprise Finance in India: A Research Study on Needs, Gaps and Way Forward', recommends a mix of well-rounded fiscal support, a strong policy framework and incentives promoting innovation to significantly expand formal financing to these enterprises.

"The micro, small and medium enterprise sector has the potential to stimulate growth," said S Muhnot, chairman and managing director, Small Industries and Development Bank of India (Sidbi). "With adequate financial resources and specialised skill development, the sector can grow manifold and contribute to the economy."

India has an estimated 30 million MSMEs across industries, employing 69 million people. The sector accounts for 45 per cent of industrial output, and has been growing consistently at over 11 per cent a year, higher than India's overall economic growth. Inadequate financing and market linkages constrain the growth of these businesses. The study, jointly undertaken by IFC and the government of Japan, outlines potential interventions to address their biggest challenge of accessing finance.

"The study provides a framework for the financial sector and policy makers to develop appropriate and innovative products and services that will ensure easier flow of capital to these smaller businesses," said Anil Sinha, IFC's general manager for advisory services in South Asia.

MSMEs are an essential focus of IFC's work in South Asia. In addition to making investments in private sector projects, IFC - the largest global development institution focused exclusively on the private sector - works with governments to improve the investment climate, builds skills of local entrepreneurs, and promotes access to finance and markets for small businesses.