Only 33-34 per cent of over 26 million micro, small and medium enterprises have access to bank and institutional financing, leaving the rest to raise funds through informal channels, according to a study by industry chamber Assocham.

“Lack of adequate finance due to shortage of organised lending from banks and other formal sources of finance, together with absence of transparency regarding their financial condition, is proving to be a stumbling block in growth of MSMEs in India, more so in Eastern and North-Eastern pockets of the country,” says the study.

The ‘Indian Banking Industry: Sustaining Growth with Equity,’ study was jointly conducted by the Associated Chambers of Commerce and Industry of India and Resurgent India.

The current overall debt finance demand of the sector is over Rs 32 lakh crore; of this over Rs 6 lakh crore is financed through the formal sector. Public sector banks account for over 70 per cent of debt financing to the small-scale sector, while private and foreign banks account for over 20 per cent of credit flow, the study says.

Transparency

There is need for transparency of financial conditions of these units as this influences decisions on loan finance, which is one reason why banks hesitate to give loans to small units.

A fairly significant proportion of loans given to small enterprises in the past have compounded the problem of non-performing assets, said D.S. Rawat, Secretary-General of the chamber.

The study suggested that banks should work with tiny units linked to supply chains of their large corporate customers and leverage this relationship to manage and control credit exposures.

“Another way could be to co-write credit with a trusted non-banking finance company partner, where first lien on collections remains with the bank. This way, both partners leverage their respective strengths,” the study has proposed.

> aditi.n@thehindu.co.in

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