India's Vulnerable MSMEs: Navigating Funding Challenges

India is home to over 70 million micro, small and medium enterprises (MSMEs) with approximately 98 per cent of them falling under the micro category. Notably, up to 60 per cent of these micro enterprises are situated in rural regions across the nation. However, the challenge of accessing capital remains a significant hurdle for these organisations. 

While speaking at the fifth edition of the BW Emerging Business Summit & Awards, experts delved into the realm of debt funding and equity investment, shedding light on the implications that MSMEs must bear to make informed financial decisions. 

Highlighting these statistics, Vinay Singh, Head- Self-regulation and Compliance, MFIN said, “As per a recent report, loans totalling around 2.7 million have been disbursed by the end of March, with a notable portion, a quarter of the total, allocated to the micro-segment. Intriguingly, nearly 60 per cent of the fresh loan applicants fall within the micro category.” 

Experts said that the MSME sector demands significant attention, prompting financial institutions to prioritise two key aspects. Firstly, they need to secure increased funds to facilitate lending to borrowers. Secondly, there is a pressing need to encourage borrowers to formalise their operations, ensuring that lenders are confident in extending loans. 

Kulbhushan Parashar, Director, Corporate Capital Ventures shared, “The predominant challenge lies in the realm of awareness. Among the current pool of 7 million SMEs in India, a mere 800 have embarked on the path of listing in the last ten years. This figure underscores the prevalent lack of awareness. There's actually a lot of money available for companies through equity and investment, but most SMEs don't know how to tap into it.” 

The hesitation might be a result of SMEs assuming that the listing process is complex in India, which isn't necessarily true, experts noted. Additionally, there is an apprehension that listing entails surrendering ownership of their enterprise. Another challenge is rooted in governance concerns, as they are hesitant to subject themselves to external reporting, which is more of a mental barrier. 

“MSMEs should consider options beyond bootstrapping. A significant hurdle they face is dealing with delayed payments and cash flow issues. Solutions like invoice factoring and purchase order financing can be game-changers for MSMEs in India, helping them grow. Supply chain financing is also crucial, as it ensures timely payments across the entire supply chain. This kind of support can make a big difference for MSMEs,” added Anirudh Saraswat, Founder and CBO, Oriana Power.  

Amid India's quest to achieve a USD 5 trillion economy and to become a developed nation by 2047, Indian MSMEs have a major role to play as they drive economic growth and innovation. As these enterprises strive to expand their operations, invest in technology and enter new markets, the question of funding becomes paramount.  

Singh added, “At present, obtaining debt is challenging due to the substantial collateral requirements. While having collateral is one thing, turning it into cash isn't a straightforward task. However, we're witnessing changing policies in this regard. On the product development front, frameworks like account aggregators, borrower formalization, and GSTN data are playing a crucial role in easing cash flow lending processes.” 

From the intricacies of collateral requirements to the evolving policy landscape, from the perception of listing to the impact of sustainability practices, MSMEs can navigate the terrain of financing options. 

“The government is actively promoting green financing, and it's supporting sustainability by offering reduced or no collateral requirements. Additionally, ESG (Environmental, Social, and Governance) funds are gaining traction in India. MSMEs that aren't currently engaged in sustainability practices can consider various options. For instance, they can invest in solar panel installations to cut down on electricity expenses. Moreover, they can explore initiatives like generating electricity from waste, and there are loans available to support these ventures,” highlighted Saraswat.  

Corporate Capital Ventures' Prashar added that distinguishing between startups and MSMEs in terms of equity is essential. MSMEs often prioritise building their businesses before seeking equity investment, unlike startups. "During the initial growth phase, MSMEs can consider starting with debt funding. With sufficient funding and effective guidance, SMEs have the potential to achieve substantial growth, possibly surpassing even the scale of unicorns," Prashar added.