Trading MSMEs rely more on supplier credit

CRISIL has studied the performance of 2,100 micro, small, and medium enterprises (MSMEs) rated by it in the trading sector in 2013-14 (financial year April 1 to March 31). The study was conducted to understand the sector's working capital patterns, which indicates that these enterprises depend more on credit provided by suppliers than on short-term borrowing from financial institutions (FIs). About 41 per cent of their aggregate working capital is financed by supplier credit, in comparison to 30 per cent arranged by FIs.

MSMEs in the trading space consider supplier's credit as the best option for funding inventory owing to the lack of timely and collateral-free credit from FIs. MSMEs generally have limited access to credit, which forces them to borrow from suppliers or unregulated sources, and thus they end up paying much higher interest. This impacts their profitability and also leads to product overpricing. Availability of credit at affordable cost is therefore critical for MSMEs in the trading sector.

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  Note: CRISIL has rated over 50,000 MSMEs in India. This fortnightly tracker presents to our readers insights on MSMEs, a key element of the Indian economy.