GAME’s Finance Taskforce releases “Unlocking credit for India’s job creators”, identifying opportunities to serve India’s 27 million job creating MSMEs
New Delhi: As India grapples with the health and economic impact of the COVID-19 pandemic, an immediate challenge is to resurrect the MSME sector that forms 95 percent of all businesses in India. A major source of employment, growth, and innovation in the country, the MSME sector, despite contributing ~30% of GDP, MSMEs account for less than 20% of credit exposure to industries[1]. To bridge this gap and provide fillip to an impending economic resurgence for MSMEs, the Finance Task Force of the Global Alliance for Mass Entrepreneurship (GAME), has launched ‘Unlocking Credit for India’s Job Creators’, a report that brings together insights and actionable ideas from across the Financing ecosystem in India.
Comprising of policymakers, corporate leaders, MSME support organizations, academia, and financiers the GAME Finance Task Force discusses greater access to formal finance, easing working capital needs, and mitigating risk through insurance. Solutions, insights, and data are highlighted to align the interests of all stakeholders and are market-driven, sustainable, and congruent with the commitment to enhancing the ease of doing business. The recommendations also aim to correct for the lack of bargaining power of MSMEs vis-à-vis their large buyers.
Speaking on the launch of the report, Ravi Venkatesan, Founder, GAME said, “With the call for an ‘Aatmanirbhar Bharat’, the Government of India has signaled that MSMEs will drive job creation in India. However, MSMEs in India struggle to grow out of cycles of informality, low productivity, and low scale. Finance is critical to break this cycle as entrepreneurs can invest in machinery, upskilling workers, and new units thereby increasing productivity and scaling up. Our report brings together some essential ideas to accelerate finance towards India’s job creators ”
Less than 15% of India’s MSMEs have access to formal finance. The report identifies the importance of NBFCs, FinTech firms, and platforms such as OCEN as lynchpins for bringing these new to credit customers to the formal. Partnerships with India’s banks are critical to their success. However, 80% of bank exposure to NBFCs goes to just 30 entities, limiting the pie for several smaller NBFCs and FinTech lenders, who struggle to scale quickly.
The report estimates at least INR 15 lakh crore of MSME receivables stuck with their buyers. This ‘delayed payments’ problem creates a severe working capital crunch that reduces production cycles, investments, and job creation. This also translates to higher cost of goods for the buyer. Supply Chain Financing and factoring can be both beneficial for buyer and supplier. Either through bilateral contracts with banks or platforms such as TreDS, MSMEs can access working capital quickly. The report identifies policy changes that can expedite the uptake of such mechanisms.
““Delayed payments result in higher costs of goods and services for buyers and raise the cost of finance for suppliers. They have a baneful impact on both the GDP and the resilience of supply chains. Supply chain financing and factoring solutions can smoothen cash flows. Timely payments, by resorting to financing solutions or otherwise, carry their own incentives. Balancing these by disincentives for payment delays, can greatly benefit the MSME segment and the economy as a whole” said Anjuly Duggal, GAME Finance Taskforce Chairperson and former DFS Secretary, Government of India
These themes will be crucial to make MSMEs resilient to a second wave of Covid and subsequent shocks and stresses as well. Going forward, the taskforce intends to engage stakeholders mentioned through the report. Several solutions will likely require greater deliberation and GAME intends to support or initiate multi-stakeholder coalitions that could begin to crack these problems open.