MSME Financing Market in India 2023-2028

MSME Financing Market in India 2023-2028

The Ministry of Micro, Small and Medium Enterprises classifies MSMEs according to their investments in plant and machinery, equipment, and annual turnover. In India, MSMEs contribute significantly to employment generation and overall socio-economic development. Nevertheless, the growth of MSMEs has historically been hampered by limited access to funding. To address the challenge of insufficient credit availability, the government has implemented various policies that provide loan facilities to MSMEs.

Market Insights:

As of FY 2023, the MSME industry provided employment to over 111 million individuals, establishing itself as the second-largest sector for job creation in India, with agriculture being the largest. In the same fiscal year, the MSME sector contributed to approximately 50% of India's total exports. Across the country, about 33 million MSMEs are in rural areas, while 31 million operate in urban regions. Out of the approximately 111 million individuals employed directly or indirectly within the Indian MSME sector, around 38.72 million are engaged in trade activities, and approximately 36.05 million are involved in the manufacturing sector.

Market drivers:

The e-mandate service, introduced by the Reserve Bank of India (RBI) and the National Payments Corporation in India (NPCI), aims to provide supportive infrastructure for companies to facilitate the collection of recurring payments within the country. Fintech players have introduced digital e-NACH services, replacing traditional physically signed paper-based NACH application forms. This transition helps in reducing financial costs and processing time. NBFC Account Aggregators (AA) are financial entities that provide organized data on a customer's various accounts held in different NBFCs, contributing to the reduction of obstacles in consolidating financial data.

Market challenges:

The industry is grappling with a notable information gap concerning the borrowing processes and loan acquisition. A majority of MSME units in the country lack the necessary documentation to fulfill loan eligibility criteria. MSME loans, particularly from traditional financial institutions, often yield lower profits due to their smaller ticket size and the increased costs associated with due diligence and collections. Consequently, financial institutions exhibit hesitancy in investing in the MSME sector.