NITI Aayog proposes easing eligibility for loan subsidy for MSMEs

Government think tank NITI Aayog has pitched for relaxing eligibility criteria for schemes that offer subsidies for capital and interest on loans at the state level to enhance competitiveness of micro, small and medium enterprises (MSMEs) in the country.

The Aayog in a report titled 'Enhancing MSMEs Competitiveness in India' also suggested making skill development initiatives easily accessible, especially for MSMEs that face challenges due to their location or size.

"At the state level, lowering eligibility barriers for schemes that offer subsidies for capital and interest on loans will better address the financing needs of MSMEs throughout their lifecycle," the report said.

Given their success in providing credit to MSMEs, especially in remote areas, it said non-banking financial companies (NBFCs) need to scale up their operations.

The report suggested that a crucial step in this process is for SIDBI to play a significant role by providing funding to help NBFCs improve their capacity and governance structure.

"While MSMEs have gained better access to loans, a significant credit gap still exists in the sector," the Aayog said in its report.

It noted that to address this issue, there is a need to reform the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) by enhancing regulatory oversight and further reducing risk premiums for borrowers seeking CGTMSE funding.

According to the report, between 2020 and 2024, the share of micro and small enterprises accessing credit through scheduled banks rose from 14 per cent to 20 per cent, while medium enterprises saw an increase from 4 per cent to 9 per cent.

"Despite these improvements, the report reveals that a substantial credit gap remains. Only 19 per cent of MSME credit demand was met formally by FY21, leaving an estimated Rs 80 lakh crore unmet," it said.

The report pointed that Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) has expanded significantly, but still faces significant limitations.

"To bridge the credit gap and unlock inclusive, scalable finance for MSMEs, the report calls for a revamped CGTMSE, supported by institutional collaboration and more targeted services," the report said.

As per the report, tailored policies are necessary to support the technological upgrading of micro and small enterprises, addressing their basic technology needs and enhancing their productive capacity.

"Furthermore, states should develop MSME-specific infrastructure, such as co-working spaces, industrial parks, and shared facilities, to enhance scale and competitiveness," it added.

The report delves into the key challenges affecting the competitiveness of MSMEs in India.

The report focuses on four important sectors -- textiles manufacturing and apparel, chemical products, automotive, and food processing -- while highlighting the sector-specific challenges and opportunities that need to be addressed to unlock the potential of MSMEs in India.

The report examines current national and state policies, highlighting gaps in implementation and limited awareness among MSMEs.

The report also highlighted the pressing issue of skill shortages within the MSME sector.

"A large portion of the workforce lacks formal vocational or technical training, which hampers productivity and limits the ability of MSMEs to scale effectively," it said  According to the report, many MSMEs also fail to invest sufficiently in research and development (R&D), quality improvement, or innovation, making it difficult to stay competitive in national and global markets.

The report further pointed out that MSMEs face barriers in adopting modern technologies due to unreliable electricity supply, weak internet connectivity and high implementation costs.

"Despite state government schemes designed to support technological advancement in MSMEs, many enterprises are either unaware of them or unable to access them," it said.

In its analysis of clusters, the report reveals that upgrading outdated technologies and improving marketing and branding capabilities are critical to improving competitiveness.