Lending Pattern for Micro, Small and Medium Enterprises
Micro, Small and Medium Enterprises (MSME’S) play a major role in most global economies. This calls for a better understanding of the financing aspects of MSME’S. In general there are two broad classifications for financing MSME’S, formal and informal. The formal source comprises of banks and financial institutions who are the lenders of first resort. These are governed by various policies which direct them to provide financing options for MSME’S which form a part of the priority sector. Financial institutions have been set up specifically to provide finance and guidance to MSME’S. Banks on the other hand are stipulated by RBI to ensure that they provide financing to MSME’S as part of their priority sector lending. The informal sector consists of money lenders, chit funds and family members of the promoter. The money lenders and chit funds comprise of the informal micro finance sector that is prevalent in the Indian economy. The formal sector perceives the MSME market as a risky prospect. This is a result of the unreliability of the revenue streams of the micro industries, lack of modern management practices, technological constraints and government policy relating to writing off of bad loans. This has created the very negative impression of the MSME market which has resulted in a reluctance of banks to provide finance. The lack of adequate finance option from the formal sector has led to the informal sector comprising of money lenders and chit funds as a major source of financing for MSME’S.
Key words: MSME, RBI, Lending process, Finance, SIDBI
Financing of MSME’S is a topic of great interest to both the government and various development financial institutions. MSME’S all over the world play a major role in the economic development of various countries. Time and again they have proved they are dynamic, innovative and a major source of employment. There is an abundance of growth in entrepreneurship in this sector. MSME’S sector is an important driving force for achieving various socio-economic objectives such as fostering entrepreneurship, employment generation and contribution to national trade. The financing of MSME’S usually is of two types, formal and informal. The formal market consists of commercial banks as one of the prime sources of finance for MSME. Then there is an informal sector that ranges from relatives to money lenders, which is usually for smaller projects. The challenges faced in financing for MSME’S is due to the prevalence of the informal sector as a source of financing. This is a result of the banks unwillingness to take up MSME financing due to reasons such as technological constraints, loans written off, competition from major players and a weak revenue stream.
The Study done by International Finance Corporation (November 2012) talk about the contribution made by the MSME towards the growth of the GDP. The financial requirement of by these MSME and the shortfall they face for the same. The shortage of the helping hands created more problems for the sustainability of the MSME.
RBI master circular concentrate on defining MSME. It spoke about the importance of financing to the MSME and making it mandatory for the Commercial Banks to do the same. The guidelines provided for lending process and helping MSME to grow at a faster rate.
Research paper presented by Rajib Lahiri concentrated more on the lending amount by the commercial banks to the MSME and the effect of this in the growth of the MSME.
The MSME annual report published by the Government of India portrait the growth of MSME and the opportunities created for the people to develop more.
The specialized function of this chapter is to explain the research...
References: RBI Master Circular ‐ Lending to Micro, Small & Medium Enterprises (MSME) Sector
IFC: Report on Micro Small and Medium Enterprise Finance in India, November 2012.
Ministry of MSME, Govt. of India: Annual Report 2011-12.
Research Paper by Rajib Lahiri: Problem and Prospects of MSME in India in the area of globalization.
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