CHALLENGES IN CHANGING LANDSCAPE IN MSME LENDING FOR BANKS & SUGGESTIVE MEASURES
BANKING FINANCE|December 2019
The Role of MSMEs in the economic and social development of a country can hardly be over- emphasized. They are the major contributor in export, GDP and they play a significant role in maintaining balance in economic development yet they suffer from lack of adequate finance.It has been observed that business with tremendous growth potential fails to gain strong foothold due to paucity of both short term & long term finance.Banks/ FIs has important role to play in nurturing the small business units by providing them with adequate finance. It is observed that "Return on Capital Employed" in case of MSMEs using external finance is higher compared to SMEs who do not borrow. Unfortunately, still many MSMEs are unbanked; they still rely on informal sources of finance such as family, friends and relatives.The banks/ FIs also face several challenges in lending to MSMEs due to the inherent limitations of the sector like inability to submit required papers, lack of adequate collateral security, poor business financials etc.In this article , we have discussed the major challenges faced by banks in lending to MSMEs and some suggestive measures for improvement.
R Sumitra
CHALLENGES IN CHANGING LANDSCAPE IN MSME LENDING FOR BANKS & SUGGESTIVE MEASURES

Small and Medium enterprises (SMEs) are the growth engine of our economy. They employ approximately 40% of the India's work force; contribute to around 45% of the manufacturing output and 40% of total India's export. Hence, supporting financial needs of SMEs is crucial. Despite their contribution to the economy, they face the challenge of inability to gain sufficient access to formal lending. As per the BCG reports, nearly 40% of the lending to MSME sector are happening through informal sources like from friends, family and relatives only.

Some facts regarding SME lending in India:

1. As per financial reports, Outstanding bank credit to SMEs/Nominal GDP in India in the year 2015 was 6.2% only which was 2nd lowest in the world after Russia.

2. Only 4% of the MSMEs have "Access to finance" in India as against around 21% in countries like China, Malayasia and Philippines.

The major pain points in access to formal lending includes long processing time, information asymmetry, complex documentation, inability to offer collateral security and high cost of borrowing. While overall credit growth stood at 19.6% (YOY Sep 17- Sep 18) for micro and SME segments, the MSMEs portfolio of public sector banks is showing a declining trend. The market share of PSBs in MSME lending has declined to 48.1% in (Sep'18) from 58.6% in Sep'16 (55.0% in Sep'17) (Source - MSME pulse, December 2018).

The MSME lending landscape is undergoing a paradigm shift. Digitalization, formalization and new government initiative is changing the lending pattern in the MSME sector.

Digitalization has opened new lending avenues for MSMEs such as Peer to Peer Lending, payment banks, NBFC, etc. These new-age lenders are leveraging technology to originated SME loans in huge volumes.

Denne historien er fra December 2019-utgaven av BANKING FINANCE.

Start din 7-dagers gratis prøveperiode på Magzter GOLD for å få tilgang til tusenvis av utvalgte premiumhistorier og 9000+ magasiner og aviser.

Denne historien er fra December 2019-utgaven av BANKING FINANCE.

Start din 7-dagers gratis prøveperiode på Magzter GOLD for å få tilgang til tusenvis av utvalgte premiumhistorier og 9000+ magasiner og aviser.

FLERE HISTORIER FRA BANKING FINANCESe alt
ICICI Bank partners with PhonePe to offer instant credit on UPI
BANKING FINANCE

ICICI Bank partners with PhonePe to offer instant credit on UPI

ICICI Bank announced that it has partnered with PhonePe to offer instant credit on UPI to its pre-approved customers on the app of the digital payments company.

time-read
1 min  |
November 2024
Indiagold Eyes Major Expansion in India's Gold Loan Market
BANKING FINANCE

Indiagold Eyes Major Expansion in India's Gold Loan Market

Indiagold, a prominent fintech company specialising in gold loans, is set to disrupt the gold loan industry with its ambitious expansion plans and innovative product offerings.

time-read
1 min  |
November 2024
RBI CIRCULAR
BANKING FINANCE

RBI CIRCULAR

Facilitating accessibility to digital payment systems for Persons with Disabilities Guidelines

time-read
4 mins  |
November 2024
Legal News
BANKING FINANCE

Legal News

The Supreme Court announced the launch of a new webpage on its official website providing summaries of landmark judgments.

time-read
5 mins  |
November 2024
The Role and Impact of the Insolvency and Bankruptcy Code (IBC) in NPA Recovery
BANKING FINANCE

The Role and Impact of the Insolvency and Bankruptcy Code (IBC) in NPA Recovery

Indian banks, especially grappling with the mounting challenge of Non-Performing Assets (NPAs) within Scheduled Commercial Banks (SCBs), are experiencing a significant downturn in their capacity for credit recycling, resulting in reduced business opportunities and declining profits. However, various factors contributing to the severity of NPA problem are including macro-economic, political, and internal factors, emphasizing the complexity of the issue. With this background, the present study puts an effort to look at the role of the Insolvency and Bankruptcy Code (IBC) in NPA recovery and also showcasing its significance in resolving insolvency and maximizing creditor recovery.

time-read
8 mins  |
November 2024
Big Data in Banking: Analysing its Role, Advantages and Challenges
BANKING FINANCE

Big Data in Banking: Analysing its Role, Advantages and Challenges

Globally Inflation started rising post April 2021 and went above the target range set by most of the Central Banks. It had remained low and dormant for a substantial duration since the global financial crisis. CPI inflation in developed countries such as US, UK and Euro zone, began to exceed their traditional target of 2% and continue to stay at these elevated levels till recent time.

time-read
5 mins  |
November 2024
Is SIP Always the Best Option? A Look into Lump-Sum vs SIP During Volatile Markets
BANKING FINANCE

Is SIP Always the Best Option? A Look into Lump-Sum vs SIP During Volatile Markets

SIP is a method of investing a fixed amount at regular intervals, typically monthly, into a mutual fund. It allows investors to buy more units when prices are low and fewer when prices are high, a process known as rupee cost averaging.

time-read
6 mins  |
November 2024
Strategies for Mutual Fund Retail Investors during market downturns
BANKING FINANCE

Strategies for Mutual Fund Retail Investors during market downturns

When stock markets experience a decline, mutual fund investors often face a sense of insecurity and apprehension. The volatility can lead to impulsive decisions, which, rather than securing financial health, may impair long-term investment objectives.

time-read
5 mins  |
November 2024
The Rise of Green Marketing: Driving Sustainable Change
BANKING FINANCE

The Rise of Green Marketing: Driving Sustainable Change

Green marketing refers to the practice of promoting products or services that are environmentally friendly or sustainable. It involves incorporating eco-friendly elements into various aspects of marketing strategies, including product development, packaging, advertising, and distribution.

time-read
8 mins  |
November 2024
Fraud Risk Management In Banking
BANKING FINANCE

Fraud Risk Management In Banking

Fraud risk management is a fundamental aspect of overall Risk Management within the banking sector. In India, banks adhere strictly to guidelines set forth by the Reserve Bank of India (RBI) to prevent, detect, and promptly report fraudulent activities.

time-read
6 mins  |
October 2024