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What are the challenges SMEs face in accessing credit despite plethora of Government schemes?

What are the challenges SMEs face in accessing credit despite plethora of Government schemes?

by deAsra Foundation

The micro and small businesses sector in India hosts a diverse range of organisations, across the scale of businesses, types of businesses, products, and service offerings. India has around a 63million small and micro businesses, with 36 percent engaged in commerce, 33 percent in other services, and the remaining 31 percent in manufacturing. After agriculture, the SME industry is the second largest employer in India, employing around 110.8 million people, capturing over 20% of national employment. Over the last five years, there have been numerous policies and campaigns that have aided the growth of these enterprises, including Make in India, Credit Guarantee Trust Fund for Micro & Small Enterprises, Micro & Small Enterprises Cluster Development, Digital India, and Skill India, along with robust infrastructure, councils supporting SME export, and credit support.  

On working with SME enterprises, deAsra Foundation identified that while there are plenty of opportunities to access finance/credit, enterprises do not have the necessary documentation, licenses to access these schemes and programs designed to cater to them. For instance, they may not have a business PAN card, or be GST registered, or have registration documentation. Additionally, individuals lack creditworthiness and lack digital presence. Hence, many SMEs aren’t eligible to apply for business loans and schemes offered in the market. deAsra had launched the MSME loan program (wherein it connected entrepreneurs with 5 Micro financial institutions), where it was found that approximately 70% of the candidates were ineligible due to low creditworthiness, lack of formalisation and lack of digitization. This was a significant gap, and MSME loans would not be able to ensure and delivered until these needs were met.

The Covid-19 pandemic arrived with a huge toll on small businesses. Apart from disrupting livelihoods, Covid 19 also caused a standstill in operations, credit availability, labor supply, supply chains, business continuity and resulted in an extreme liquidity crunch. SMEs have been negatively impacted due to the global pandemic and their challenge of accessing finance is further exacerbated in these precarious times. Due to the reduction in output, income, and financial flows to the industry, the sector has resulted in a loss of jobs and increasing during the lockdown and afterward. Due to repeated losses in business, several entities, notably in the micro and small segments of the sector, were compelled to leave the market. As a result, debt relief to this industry is critically needed.  Thousands of businesses shut down operations across the countries. The businesses that stayed open-faced massive reductions in revenues, with reduced demand and cash flow shortages. As per X, more than 60% of the SME sector’s economic operations in India were also completely halted, because of the shutdown.

Furthermore, the pandemic impacted their access to formalisation services and access to credit, inhibiting them from potential growth. With cash flow as the primary challenge, it was essential to assist businesses and provide them the resources to easily access liquidity and credit to grow their businesses. 

The Business Loan Readiness Program  (BLRP)  by deAsra was launched to fulfil that exact need. The program was aimed at building literacy and knowledge around fundraising and ensuring that entrepreneurs have the tools and resources available to avail funds from formal lending institutions, such as non-banking financial corporations and banks. During the program, the entrepreneurs were given personalised and contextual learning and tools, around business formalisation, creditworthiness, and digital formalisation. It covered the sources and processes to gain funding, methods to improve the creditworthiness of enterprise, enterprise formalisation processes, including business identity formation and financial formalisation, tools to digitise enterprises among other related support services. 

A survey of the participants of the BLRP program showed that more than 90% of the small business owners did not have the required documentation to be eligible for a business loan. Furthermore, a similar share of participants was found to lack creditworthiness and digitisation. Although we see the introduction of various funding-related initiatives for SMEs, it can be noted that it is equally important to focus on enhancing the funding readiness of these SMEs. Curating and implementing programs like BLRP can help small business owners understand their present loan readiness and subsequently be guided towards tick marking the requisite checklist. Consequently, this will allow a greater number of small business owners to have a better likelihood of availing credit, which would prove to be beneficial especially in the midst of a pandemic economy. This can be echoed further by survey responses from the respondents wherein the most voted features of the program were the content of the modules and expert consultations. Furthermore, over seventy percent of the respondents shared that they found the program has value for the registration money spent. Another sentiment voiced by more than 60 percent of respondents was that they would recommend the BLRP program to other budding entrepreneurs, especially those with relatively newer businesses. 

Programs such as the BLRP need to be administered on large scales to see a rise in the credit eligibility of SMEs. However, these programs would be successful in their quest if only a conducive business environment is in place. The presence of a business environment which gives equal opportunities to SMEs offers a sound physical infrastructure, easy access to finance, macroeconomic stability, ease of entry into the market, does not indulge in an exhaustive regulatory framework and encourages innovation and research, is critical for the complete success of programs such as the BLRP. 

(About deAsra: deAsra Foundation is a non-profit organization founded by Dr. Anand Deshpande, Founder, Chairman and MD of Persistent Systems Limited, with the aim to help entrepreneurs in their entrepreneurial journey. We believe that small businesses are the job creators that are necessary to eradicate unemployment in India and are engines of growth for our country, and with that objective in mind deAsra enables individuals to start, manage, and grow their businesses successfully, More than 120,000 entrepreneurs have already benefited from our tools and programs.)

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