Executive

summary--------------------------------------------------------Before going to describe about the topic i.e. Credit flow to MSME Sector, It is an essential to
know about what is MSME? The abbreviation of MSME is Micro, Small and Medium
Enterprises. The Micro scale industries are those industries whose total fixed expenditure
does not exceed 25 lacs, Small scale industries are those industries whose total fixed
expenditure is does not exceed 5 crore and Medium enterprises are those whose total fixed
expenditure is above 5 crore and below 10 crores.
Micro, Small and Medium Enterprises (MSMEs) play a vital role for the growth of Indian
economy by contributing 45% of industrial output, 40% of exports, employing 80 million
people, create 1.3 million jobs every year and produce more than 6000 quality products for
the Indian and international markets. Despite its commendable contribution to the Nation's
economy, MSME Sector does not get the required support from the concerned Government
Departments, Banks, Financial Institutions and Corporate, which is a handicap in becoming
more competitive in the National and International Markets.

Gross Value of Share of MSME sector in total GDP (%)

Output
of MSME
Services
Manufacturing
Manufacturing
Sector
Total
Sector MSME
Sector
MSME
(` in crore)

Year

2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13

1198818
1322777
1375589
1488352
1653622
1788584
1809976

7.73
7.81
7.52
7.45
7.39
7.27
7.04

27.40
27.60
28.60
28.60
29.30
30.70
30.50

35.13
35.41
36.12
36.05
36.69
37.97
37.54

Share of MSME
Manufacturing output
in total
Manufacturing Output
(%)
42.02
41.98
40.79
39.63
38.50
37.47
37.33

Source:
1. Fourth All India Census of MSME 2006-07,
2. National Accounts Statistics (2014), CSO, MOSPI and

3.

Annual Survey of Industries, CSO MOSPI

Following are the main challenges faced by the MSME sector:

MSME have inadequate access to finance due to lack of financial information and
non-formal business practices.

In India, there is not availability of suitable technology in operational field.

Due to scarcity of fund, there is low production capacity, non-availability of skilled

labour and there are constraints in modernisation and expansions.

Introduction------------------------------------------------------------------With the advent of planned economy from 1951 and the subsequent industrial policy
followed by Government of India, both planners and Government earmarked a special role
for micro-scaled industries, small-scale industries and medium scale industries in the Indian
economy. Due protection was accorded to both sectors, and particularly for small scale
industries from 1951 to 1991, till the nation adopted a policy of liberalization and
globalization. Certain products were reserved for small-scale units for a long time, though
this list of products is decreasing due to change in industrial policies and climate.
MSMEs always represented the model of socio-economic policies of Government of India
which emphasized judicious use of foreign exchange for import of capital goods and inputs;
labour intensive mode of production; employment generation; non concentration of diffusion
of economic power in the hands of few (as in the case of big houses); discouraging
monopolistic practices of production and marketing; and finally effective contribution to
foreign exchange earning of the nation with low import-intensive operations. It was also
coupled with the policy of de-concentration of industrial activities in few geographical
centres. It can be observed that by and large, MSMEs in India met the expectations of the
Government in this respect.
MSMEs in spite of having low Capital base with concentration of functions in one / two
persons, inadequate exposure to international environment and inability to face impact of
WTO regime, inadequate contribution towards R & D and lack of professionalism, MSMEs
have made significant contribution towards technological development and exports.
MSMEs have been established in almost all-major sectors in the Indian industry such as:
Food Processing; Agricultural Inputs; Chemicals & Pharmaceuticals Engineering; Electricals;
Electronics; Electro-medical equipment; Textiles and Garments; Leather and leather goods;
Meat products; Bio-engineering; Sports goods; Plastics products; Computer Software, etc.
The contribution of MSMEs in the Indian economic development has been immense. The
sector currently accounts for about 45 per cent of the manufacturing output and around 40
percent of the total exports of the country. There are approximately 26.1 million MSMEs
which employ nearly 80.5 million people. Thus, special thrust by the Government to the
sector has been consistent with the objectives of employment generation, regional dispersal
of industries and fostering of entrepreneurship.

About
MSME--------------------------------------------------------------------Micro, Small and Medium Enterprises (MSMEs), including khadi and village/rural
enterprises are credited with generating the highest rates of employment growth and account
for a major share of industrial production and exports. They also play a key role in the
development of economies with their effective, efficient, flexible and innovative
entrepreneurial spirit. The socio-economic policies adopted by India since the Industries
(Development and Regulation) Act, 1951 have laid stress on MSMEs as a means to improve
the countrys economic conditions.
The Micro, Small and Medium Enterprises (MSME) Sector is an important pillar of the
Indian economy by way of creating employment of about 80.5 million through 26.1 million
units, manufacturing more than 6000 products, contributing about 45% to manufacturing
output and about 40% of exports, directly and indirectly.
The micro, small and medium enterprises segment has been a topic of intense deliberation
among banks, financial institutions, industry and academicians. In India, micro, small and
medium enterprises (MSME) is a generic term used. The MSME sector produces a
wide range of industrial products such as food products, beverage, tobacco
and tobacco products, cotton textiles, wool, silk, synthetic
products, jute,
hemp & jute
products, wood & wood products, furniture and fixtures, paper & paper products, printing
publishing and allied industries, machinery, machines, apparatus, appliances and electrical
machinery. MSME sector also has a large number of service industries.
In India, MSME is the biggest provider of employment next only to Agriculture. The MSMEs
constitute 95% of total industrial units and constitute 40% of total industrial output.
Banks
were advised to formulate
comprehensive and more
than the existing policies in respect of loans to MSME Sector.

liberal

policies

SWOT
analysis---------------------------------------------------------------STRENGTHS

Contribution to National Economic Growth.

Generating Employment and Vitalizing Indian brand to the world.
Regional Development.
Technological Innovation.
Export Market Expansion.

WEAKNESS

Lack of Funds
Lack of Marketing Skill
Lack of Information.
Poor adaptability to changing trade trends.
Nonavailability of technically trained human resources.
Lack of management skills.
Lack of access to technological information and consultancy services.

OPPORTUNITY
Bilateral & Multilateral trade agreements.
Enhanced credit support.
Support for technological upgradation.
Comprehensive support for cluster development.
Marketing assistance and export promotion support growing domestic and
international markets.
WTO regime

THREATS

Dumping from developed countries.

Distrust between MSMEs and Financial Institutions.
Poor incentive structures for entrepreneurs.
Virtual absence of Enterprise Education.
Nontariff barriers from developed countries.
Slow improvement in quality to meet the international standards.

Composition
of
MSME
-------------------------------------------

sector

The MSME Sector includes Micro Enterprises, Small Enterprises, Artisans &
Village Industries, Medium Enterprises, Service Sector units & individual subsector units.
a. Micro Enterprises:
Micro Enterprises are those engaged in manufacturing, processing,
preservation of goods, mining, quarrying, servicing & repairing of specified
type of machinery & equipment, agro service units whose investment in
Plant and Machineries does not exceed Rs. 25.00 lacs irrespective of
location of the unit in respect of manufacturing units and investment in
equipments not exceeding Rs 10.00 lacs in respect of Service Sector units.
b. Small Enterprises:
A Small Enterprise industrial undertaking / unit is one which is engaged in
the manufacture, processing or preservation of goods or is a servicing and
repair workshop undertaking repairs of machinery used for production,
mining or quarrying or custom service unit (except water service units),
having investment in Plant and Machineries (original cost) above Rs 25.00
lacs but not exceeding Rs. 5.00 crores in respect of manufacturing unit
and above Ra 10.00 lacs but not exceeding Rs 2.00 crores in respect of
Service Sector unit.
c. Medium Enterprises:
A Unit which is engaged in the manufacture, processing or preservation of
goods or is a servicing and repair workshop undertaking repairs of
machinery used for production, mining or quarrying or custom service unit
(except water service units), with investment in Plant & Machinery in
excess of Rs 5.00 crores and upto Rs.10.00 crores in respect of
manufacturing units and investment in equipments in excess of Rs 2.00
crores and upto Rs 5.00 crores in respect of Service Sector units will be
treated as Medium Enterprises (MEs).

The MSME segment is

broadly classified as
under: Particulars
Micro Enterprises

Investment in Plant &

Machineries
of
Manufacturing
Enterprises
Upto Rs. 25/- lacs

Investment in Equipments of
Service Sector Enterprises

Upto Rs.10/- lacs

Small Enterprises
Medium Enterprises

Above Rs. 25/- lacs and

upto Rs.500/- lacs
Above Rs.500/- lacs
and upto Rs.1000/- lacs

Above Rs.10/- lacs and upto

Rs.200/- lacs
Above Rs.200/- lacs and up to
Rs.500/- lacs

Trend
of
sector------------------------------------------------------

MSME

According to the Ministry Of Micro, Small and Medium Enterprises, the number of MSME
units in India has grown at a CAGR of 4.5 per cent during FY07 FY11, and stood at 31.2
million at the end of FY11. The cumulative investments in these units rose at a CAGR of 11.5
per cent during the same period. Strong growth in total investments in MSMEs indicates
towards their expanding footprint and growing importance. The MSMEs are increasingly
contributing towards employment generation in India. The number of people employed by
MSME has grown to 80.5 million during FY14 recording a CAGR of 5.3 per cent since
FY07.

As per the fourth All-India Census of MSMEs (2006-07), 94 per cent of the enterprises are in
the unorganised sector. The MSMEs are not concentrated in terms of rural versus urban
7

origin. Rural areas account for 45 per cent of all MSMEs, while the remaining 55 per cent are
located in urban areas. On the other hand if classified with respect to sector of operation, 67
per cent are involved in manufacturing activities and the remaining 33 per cent units are
distributed in the service sector (17 per cent) and repairing and maintenance sector (16.1 per
cent), respectively.

PERFORMANCE
MSMEs----------------------------------------------------

OF

The sector has consistently registered a higher growth rate than the rest of the industrial
sector. There are over 6000 products ranging from traditional to high-tech items, which are
being manufactured by the MSMEs in India. It is well known that the MSMEs provide good
opportunities for both self-employment and wage employment.
The Office of the DCMSME (MSME) provides estimates in respect of various performance
parameters relating to the sector. The time series data in respect of the sector on various
economic parameters is given in the following Table 1.
Table 1: MSMEs Performance: Units, Employment, Market Value of Fixed Assets
Sl.
No.
I
1.
2.
3.
4.
5.
6.
7.
8.

Year
II
2006-07
200708#
200809#
200910#
201011#
201112#
201213#
201314#

Total Working
Enterprises
(in Lakh)
III
361.76
377.36

IV
805.23
842.00

Market Value of
Fixed Assets
(in Crore)
V
868,543.79
920,459.84

393.70

880.84

977,114.72

410.80

921.79

1,038,546.08

428.73

965.15

1,105,934.09

447.64

1,011.69

1,182,757.64

447.54

1,061.40

1.268,763.67

488.46

1,114.29

1,363,700.54

Employment
(in Lakh)

Including activities of wholesale/retail trade, legal, education & social services, hotel & restaurants, transports and storage
& warehousing (except cold storage) for which data were extracted Economic Census 2005, Central Statistics Office, MOSPI.
Estimated on the basis of per enterprises value obtained from sample survey of unregistered sector for activities
wholesale/retail trade, legal, education & social services, hotel & restaurants, transports and storage & warehousing(except
cold storage) which were excluded from Fourth All India Census of MSME, unregistered sector.
#

- Projected.

Contribution towards GDP

--------------------------------------------Micro, Small and Medium Enterprises (MSMEs) play a vital role for the growth of Indian
economy by contributing 45% of industrial output, 40% of exports, employing 80.5 million
people, create 1.3 million jobs every year and produce more than 6000 quality products for
the Indian and international markets. MSMEs Contribution towards GDP in 2011 was 17%
which is expected to increase to 22% this year. There are approximately 30 million MSME
Units in India and 12 million persons are expected to join the workforce in the next 3 years.
MSMEs are the fountain head of several innovations in manufacturing and service sectors,
the major link in the supply chain to corporate and the PSUs. By promoting MSMEs, the
rural areas of India will be developed.
MSMEs are now exposed to greater opportunities than ever for expansion and diversification
across the sectors. Indian market is growing rapidly and Indian entrepreneurs are making
remarkable progress in various Industries like Manufacturing, Precision Engineering Design,
Food Processing, Pharmaceutical, Textile & Garments, Retail, IT and ITES, Agro and Service
sector.

10

Credit
Flow
to
Banks------------------------

MSME

sector

from

MSME is fast growing sector in the Indian Economy. Every Bank has given highest
importance to financing MSMEs in their strategically growth plan. It has become necessary
to bring policy shift and create free market environment from regulations & interventions in
economic activity. Growth resulting from globalization and liberalization is visible most
profoundly in the MSME segment.
Funds are invariably a pressing issue for most entrepreneurs, more so for those starting or
running a small or medium enterprise. Though venture capital (VC) and private equity (PE)
funding has grown considerably in the last decade or so, micro, small & medium enterprises
(MSMEs) are still founded mostly with the entrepreneur's own money or, in some cases, with
loans from banks.
The RBIs consistent direction to PSBs to allocate 40 per cent of their lending towards the
priority sector, i.e., agriculture, small scale industries, tiny sector, village and cottage
industries, small traders, professionals and self-employed, housing loans, etc.

In order to enhance the flow of credit to the sector, various initiatives have been taken by the
Government of India/Reserve Bank of India from time to time, viz.

Enhancement of loan limit under Composite Loan Scheme

Increase in project cost limit under National Equity Fund (NEF) Scheme
Launching of Credit Guarantee Fund Trust for Small Industries
Extension of concessional assistance under Technology Development and
Modernisation Fund Scheme
Introduction of special schemes for modernization of units under Technology Up
gradation Fund Scheme for textiles and jute industries
Tannery Modernisation Scheme and Credit Linked Capital Subsidy Scheme for
Technology Up gradation.
Public sector banks have so far opened 391 specialised MSME branches so as to give
focused attention to the needs of MSMEs
Dedicated agencies for credit rating to MSME sector have been created with provision
of subsidized credit rating charges.

Financing options available for MSMEs in India--- The Long term funding includes funding through Capital market (Equity Shares,
Preference Shares, non- voting shares). Quasi capital (Investment Subsidiaries, Soft
loans/ Equity Fund Loans, VC Debts- Term Loans, Non-convertible Debentures,
Leasing and Hire Purchase, Floating Rates Notes, Structured Obligations, Bonds,
11

Technology Up-gradation and Modernization Credit from FIs, Development

Institutions )
The Short term funding includes Working Capital, Commercial Paper, Inter- corporate
Deposits, Trade Credit, Factoring, FCNR, Bills Discounting and Public Deposits.
The Foreign Funding and Miscellaneous options for MSMEs is to take Term loan
assistance, refinance, loans for leasing and hire purchase, bill discounting, foreign
currency loans, and venture capital loan.
Not many MSMEs are aware of the finance options. The MSMEs must have the acumen to
understand the business processes integrated with the banking options to meet the
requirements to continuous flow to credit. They must also have the ability to re-jig the
business process to meet the short-time challenges of the market.
Comparison of the MSME Sector with the Overall Industrial Sector
The MSME Sector has consistently
registered a higher growth rate than
that of industrial sector. Table 2.8
depict the comparative annual growth
rates of production in the MSME
segment vis--vis that of the industrial
sector as a whole since 1997 98. It
is pertinent to note that the annual
growth rate of MSME sector has
consistently outpaced that of the
industrial sector during the Ninth and
Tenth Plans. According to the
Eleventh Plan document, the MSME
sector in India has grown significantly
since 1960, when there were only 12,376 MSMEs providing employment to 10 lakh people
of which, direct employment was 1.85 lakh; annual production level was Rs 875 crore. At the
beginning of the Tenth Plan, 249 lakh people in the rural and urban areas were employed in
105.21 lakh MSMEs. This has increased to 295 lakh people in 128 lakh units now; an average
annual growth rate of 4.4% in the number of these units and 4.62% in employment. If the
units in the khadi, village, and coir sector are taken into account, the employment is estimated
to be over 332 lakh. With the inclusion of handlooms, handicrafts, wool, and sericulture, the
total job in the MSME sector in India goes up to 650 lakh. The employment intensity of the
registered units indicates that an investment of Rs 0.72 lakh is required for creating one
employment in MSME sector as against Rs. 5.56 lakh in the large organized sector.
As per the Reserve Bank of India, the credit to the Micro and Small Enterprises (MSME)
sector by Scheduled Commercial Banks (SCBs) registered a growth of 21.8% during FY
2010-11 i.e. from Rs. 3,73,530 crore as at end March 2010 to Rs. 4,54,995 crore as at end
March 2011. But it is still not enough as MSME Sector in India is growing like anything.

12

According to the data, MSME contributes around 17% to GDP but they didnt getting
adequate fund to run their business properly and some of the entrepreneur are not aware
about the financing options and their benefits. So the overall framework of the credit
dispensation is found to be inadequate in meeting the need for sufficient and timely
institutional credit to the MSMEs.

13

Banks
products-------------------------------------------------------------BANK OF BARODA (PSU)
Bank of Baroda (BoB) is the highest profit-making PSU bank in India and the third largest
PSU bank in terms of number of total business in India. It is also the country's second largest
public sector lender in terms of annual profit. BoB is ranked 715 in Forbes Global 2000 list.
BoB has total assets in excess of Rs. 3.58 lakh crores, or Rs. 3,583 billion, a network of 4002
branches (out of which 3909 branches are in India) and offices, and over 2000 ATMs. It plans
to open 400 new branches in the coming year. It offers a wide range of banking products and
financial services to corporate and retail customers through a variety of delivery channels and
through its specialized subsidiaries and affiliates in the areas of investment banking, credit
cards and asset management. Its total global business was Rs. 6,722.48 billion as of 31 March
2012.
The Maharajah of Baroda, Sir Sayajirao Gaekwad III, founded the bank on 20 July 1908 in
the princely state of Baroda, in Gujarat. The bank, along with 13 other major commercial
banks of India, was nationalised on 19 July 1969, by the government of India.
To promote the growth of MSME Sector, the Bank has launched a special and novel delivery
model, viz. MSME Loan Factory, which at present, is operationalized in 36 centres of the
Bank and well accepted in the marketplace.
The MSME Loan Factory is an innovative model for streamlining processes and for timely
sanctions of MSME loan proposals. The model comprises of the Central Processing Cell for
speedy appraisal and sanctioning of proposals within the stipulated deadline. Business Model
on assembly line is adopted by the bank for MSME segment by establishing separate Hub for
Centralized Processing of MSME proposals. This model is named as MSME LOAN
FACTORY at identified centers.
These MSME Loan Factories sanctioned loans aggregating Rs 11,071 crore during FY10 as
against Rs 8,508 crore in the previous year.
Products:
Baroda Vidyasthali Loan
Baroda Vidyasthali Loan is a special scheme for financing Educational Institutions to meet
the financial requirements for setting up the institutions which includes construction of
building, purchase of equipment etc. for the new set up as also renovation of the existing
facilities, purchase of instruments for imparting education training to the students. Limits are
minimum Rs. 25 lacs and maximum Rs. 10 crores.
14

Baroda Arogyadham Loan

The purpose is to meet the financial requirements for setting up of new Nursing
Home/Hospital including Pathological Laboratory, Expansion/renovation/modernization of
existing Nursing Home/ Hospital including Pathological Laboratory, Purchase of medical
diagnostic equipments as also office equipments, viz. computers, air conditioners, office
furniture, Purchase of ambulance etc. and to meet working capital requirements.
All entities are eligible, i.e. MSMEs, Enterprises other than individuals like Proprietorship,
Partnership firms, Private Limited Companies and Trusts engaged in providing
medical/pathological diagnostic services to the Society and with turnover upto Rs. 150/crores.
LIMIT

Rural Centres - Rs. 0.50 crores

Semi-Urban Centres - Rs. 6.00 crores

Urban & Metro Centres - Rs. 12.00 crores

Baroda Artisans Credit Card (BACC)

The purpose is to provide adequate and timely assistance to the artisans to meet their credit
requirements - both investment needs as well as working capital - in a flexible and cost
effective manner. The scheme is implemented in rural and urban areas. And limit will be
maximum Rs.2/- lakhs per borrower.
ELIGIBILE BORROWERS:

All artisans involved in production / manufacturing process.

Preference given
(Handicrafts).

Beneficiaries of other Government Sponsored loan schemes will NOT be eligible for
coverage under BACC scheme.

to

artisans

registered

with

Development

Commissioner

Baroda Laghu Udhyami Credit Card

The purpose is to provide hassle free credit facilities to Small business units, retail traders,
artisans, village industries, small scale industrial units and tiny units, professionals and selfemployed persons etc. And limit will be maximum Rs.2/- lakhs per borrower.
15

All existing customers in the categories of Small Business, Retail Trade, Artisans, Village
Industries, Small Scale and Tiny Units, Professional & Self Employed persons etc. having
satisfactory track record / dealing with the bank for last 3 years are eligible for this credit
card.
Technology Upgradation Fund Scheme (TUFS) For Textile and Jute Industries

Bank of Baroda grants loans under Technology Up-gradation Fund Scheme launched by
Government of India as per guidelines received from time to time from Ministry of Textiles.
Bank of Baroda is a nodal agency for determining eligibility and releasing of subsidy for the
cases financed by the bank under the scheme.
The objective is to provide encouragement to textile industrial units for taking up technology
up-gradation and to modernize their production facilities. The scheme envisages 5% interest
reimbursement (4 percentage for spinning industry) of the normal interest charged by the
bank on the loans availed by the units from the bank for undertaking technology upgradation/modernization.
The scheme also provides 25% capital subsidy on purchase of new machinery and
equipments for the pre-loom and post-loom operations, handlooms/up-gradations of
handlooms and testing and quality control equipments for handloom production units.

16

Problems/challenges--------------------------------------------------There are a number of issues in lending to the MSME sector, which banks generally face. The
key issues among them are outlined below:
Information Asymmetry:
Accurate information about the borrower is a critical input for decision-making by banks in
the lending process. Asymmetric information about the business prospects of small-scale
projects and financial standing of the small borrowers arises because small-scale borrowers
generally do not have a well-documented credit history. In such situations, banks may also
curtail the extent of lending even when MSMEs are willing to pay a fair risk adjusted cost of
capital. The implication of raising interest rates and/or curtailing lending is that banks will not
be able to finance as many projects as otherwise would have been the case.
Pecking Order Theory:
Pecking order theory flows from the above two issues, which makes MSME lending highly
difficult for banks. Under this hypothesis, MSMEs, which face a cost of lending that is
above the true risk-adjusted cost, will have incentives to seek out alternative sources of
funding. Evidence suggests that in such situations MSMEs prefer to utilise retained earnings
instead of raising loans from banks.
Moral Hazard:
Even when loans are made to MSMEs, it may so happen that the owners of these MSMEs
take higher risks than they otherwise would without lending support from the banks. One
reason for this situation is that the owner of the firm benefits fully from any additional returns
but does not suffer disproportionately if the firm is liquidated. This is referred to as the moral
hazard problem, which can be viewed as creating a situation of over-investment. The moral
hazard problem may, thus, result in MSME lending turning bad in a short period of time, a
situation that all banks would like to avoid.
Switching Costs:
MSMEs may find it harder to switch banks, when countered with any issue. It is a known fact
that the smaller the business, the more significant the switching costs are likely to be and,
therefore, it is less likely that the benefits of switching outweigh the costs involved. This
17

situation results in MSME lending becoming a sellers market, which may not be attractive to
MSME borrowers.

High-risk perception:
High-risk perception with small-scale sector stems from a number of factors such as weak
financial strength, inability to provide adequate collateral and other factors. Inability to
properly appraise the new projects, new firms and new activities by bankers often results in
banks shunning a small borrower.
High transaction costs:
Due to the small amounts of each loan, the aggregate costs of information gathering, due
diligence, loan processing and monitoring are much higher than for loans to large corporate
borrowers.
Miscellaneous:
Other reasons stated by banks for the weak growth of MSME credit are (i) the large number
of unregistered enterprises, which require different lending and risk management techniques,
processes, and skills; (ii) lack of a secured transactions law to regulate assignment and
registry of movables; and (iii) the difficulty and high cost of registering property and
enforcing contracts.

18

Remedies
suggestions---------------------------------------------------

Steps for Smooth MSME Lending

In order to ensure that the above issues do not stand between MSMEs and Bank Finance, the
following steps could be taken as remedial measures:
Relationships:
The length of the relationship between a bank and its MSME customers is also an important
factor in reducing information asymmetry, as an established relationship helps to create
economies of scale in information production. A relationship between a MSME and a bank of
considerable duration allows the bank to build up a good picture of the MSME, the industry
within which it operates and the calibre of the people running the business. The closer the
relationship, the better are the signals received by the bank regarding managerial attributes
and business prospects.
Collateral:
Existence of collateral that can be offered to banks by MSMEs could be one effective way of
mitigating risk. Banks could, therefore, look at collateral when pursuing the question of
MSME lending. It can also be stated that a borrowers willingness to accept a collateralised
loan contract offering lower interest (relative to unsecured loans) will be inversely related to
its default risk. However, not all MSMEs would be able to offer collateral to banks. Hence,
Reserve Bank of India (RBI) allows banks, with a good track record and financial position on
MSME units, to dispense with collateral requirements for loans up to Rs. 25 lakhs.
Quality of Information:
MSMEs are required to provide accurate and qualitative information to the banks for them to
undertake a reliable risk assessment. Accurate risk assessments obviously rely upon good
information regarding the MSME and its prospects. Hence, it is suggested that banks should
make efforts to encourage MSMEs to improve the quality of information provided.
Customer Consideration:
The MSME markets is somewhat different to the corporate market in that corporate
customers generally have a wide range of financing options to choose from and are not as
dependent on bank financing as is the case with MSMEs. The extent to which MSMEs can
take necessary steps, with the aid of public initiatives, to easily switch to another bank is

19

another factor that can influence the level of competitive pressure on banks in the case of
MSME lending.
Self-Targets:
All banks may fix self-targets for financing to MSME sector so as to reflect a higher
disbursement over the immediately preceding year, while the sub-targets for financing tiny
units and smaller units to the extent of 40% and 20% respectively may continue.
Credit Appraisal & Rating Tool:
Bank of Baroda has developed a Credit Appraisal & Rating Tool (CART) as well as a Risk
Assessment Model (BOBRAM) and a comprehensive rating model for risk assessment of
proposals for MSMEs. The banks may consider taking advantage of these models as
appropriate and reduce their transaction costs.
Increase coverage:
In order to increase the outreach of formal credit to the MSME sector, all banks, including
Regional Rural Banks may make concerted efforts to provide credit cover on an average to at
least 5 new small/medium enterprises at each of their semi urban/urban branches per year.
Create awareness:
Create awareness among banks people and MSME entrepreneurs about law and
infrastructure related to MSME Sector like:
MSMERA
MSMERA is the country's first Rating agency that focuses primarily on the Indian Micro,
Small and Medium Enterprise (MSME) segment. This would facilitate greater and easier
flow of credit from the banking sector to MSMEs.
MSMERA Credit Ratings provides a comprehensive and independent third-party evaluation
of the overall condition of the applicant. Currently, MSMERA offers Obligor Ratings which
takes into account the financial and non-financial factors that have bearing on the credit
worthiness of the applicant.
MSMED Act, 2006
The registration under Micro, Small and Medium Enterprises Development (MSMED) Act,
2006 is for facilitating the promotion and development and enhancing the competitiveness of
Micro, Small and Medium enterprises.
Benefits available under the MSMED Act
20

Registration of Micro, Small and Medium (MSM) Enterprises under MSMED Act is a very
powerful medium to enjoy the benefits available to such firms:
Micro and Small Enterprises:
Easy finance availability from Banks, without collateral requirement
Protection against delay in payment from Buyers and right of interest on delayed
payment
Preference in procuring Government tenders,
Stamp duty and Octroi benefits,
Concession in electricity bills
Reservation policies to manufacturing / production sector enterprises
Time-bound resolution of disputes with Buyers through conciliation and arbitration
Reimbursement of ISO Certification Expenses
Medium Enterprises:
Easy finance availability from Banks, without collateral requirement
Preference in procuring Government tenders
Reservation policies to manufacturing / production sector enterprises
Time-bound resolution of disputes with Buyers through conciliation and arbitration

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Conclusion----------------------------------------------------------------------

Small and Medium Enterprises (MSMEs) play a vital role for the growth of Indian economy
but some hindrances are there which restricting to grow more. In order to solve these
problems and develop the MSME sector they have to follow above suggested remedies to
become No. 1 sector in India.

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Bibliography------------------------------------------------------------------

MSME annual report 2015-16

www.MSMEchamberofindia.com
Ministry Of Micro, Small and Medium Enterprises
Bank of Baroda -----------------www.bankofbaroda.in

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