Micro, Small, and Medium Enterprises (MSMEs) play a crucial role in India’s industrial landscape, serving as essential components of the nation’s economic framework.
These enterprises make substantial contributions to both the GDP and export earnings while concurrently addressing social objectives such as fostering development in underserved regions, mitigating regional disparities, and generating employment opportunities for millions nationwide.
Nevertheless, the MSMEs in India grapple with challenges related to financial support, a dearth of business acumen, and technological obsolescence.
Additionally, Indian SMEs confront formidable competition from their global counterparts, exacerbated by factors like liberalization, outdated manufacturing strategies, and unpredictable market dynamics.
The current economic climate is not ideal for small businesses, despite the government’s efforts to keep them afloat with stimulus funds.
While there are many efforts the government has been taking to improve the sector’s financial situation, several issues still need to be addressed. We’ll walk you through the most pressing issues plaguing the industry right now. Let’s dive in.
Also Read: Highlights of the MSME Budget 2022-23
Problems Faced by MSME Sector
Here are the challenges MSMEs face:
1. Ease of Doing Business – Regulatory Issues
Most Indian start-ups encounter this issue in their early phases because of an overabundance of rules and regulations. Even though India has improved its ranking in the World Bank’s Ease of Doing Business Index, the system still has major flaws that inhibit businesses from growing and prospering.
Most of the time, difficulties with getting an MSME loan, contract enforcement, or dealing with building permits deter entrepreneurs from starting a business. While the time to establish a new enterprise has dropped from 127 days to 30 days, business owners in Mumbai must wait and go through 12 steps of procedures before they can open their doors, whereas worldwide, the average is only five.
2. Lack of Funds
Despite the government’s efforts to make business loans more freely accessible and encourage entrepreneurship, most companies still have difficulty getting financing or applying for an MSME loan. Regulatory flaws that cause delays in obtaining permits and insurance can harm the chances of small and medium enterprises. A lack of resources hampers most firms when it comes to producing their products, buying raw materials on time, or even gaining access to innovative technologies and expertise.
3. Lack of Financial Know-how
Even as entrepreneurs devise new tactics and growth prospects, there are still those who lack the financial know-how to properly manage their businesses. Some entrepreneurs may not make key business decisions relating to MSME loans if they lack prudent financial expertise. Your firm could be in jeopardy because of a lack of financial expertise unless you seek outside help.
It is also crucial to have a working grasp of money since an MSME loan can help you get through any financial difficulties that may arise. Before applying for an MSME loan, make sure you’re familiar with the terms, conditions, and interest rates associated with each type of loan.
4. Technological Advancements
Technological advancements have been plentiful, and most industries have experienced some sort of transformation to stay competitive. Although, because of a lack of experience and awareness, many firms are missing out on the latest technology advancements in their industry. As a result, MSMEs must be kept informed of technology advancements that directly impact the success of their companies. It is critical that scientific research institutions remain engaged with local MSME groups and pay attention to their technological concerns and issues.
5. Lack of Skilled Labor
One of the major problems faced by MSMEs in India revolves around the scarcity of proficient manpower. Although this challenge is not exclusive to India and is a global concern, it poses a pronounced obstacle for MSMEs in the country, despite the abundant workforce available.
The MSME sector often delves into specialized niches, necessitating expertise in specific skills. Numerous MSMEs grapple with the task of locating adept workers proficient in operating and maintaining machinery, managing financial aspects, and overseeing marketing and sales activities.
Furthermore, the dearth of skilled personnel presents a formidable barrier for MSMEs aiming to embrace new technologies and foster innovation. This deficiency is pivotal in hindering their long-term growth and jeopardizing their competitiveness in the market.
Also Read: Evolution of SME Lending In India
6. Trust Concerns
Banks are reluctant to provide MSME loans because the amounts are still tiny and because they believe MSMEs lack repayment capabilities. They end up enforcing harsher controls on these start-ups in this situation. Certain businesses have difficulty getting loans because of a lack of recognition of a company’s credit score. Adding to their woes is the fact that typical credit choices require business owners to meet stringent eligibility requirements, which further dulls their spirits.
7. Collateral for Loans
A rigorous collateral requirement can make it problematic for some businesses to access an MSME loan. Small businesses may not have the collateral or assets necessary to receive a loan from a bank. Thus business owners can take out unsecured lines of credit from creditors and not worry about meeting the MSME lending criteria.
8. Absence of Standardized Policies
In India, just a few policies are in place to support small and medium-sized businesses. As a result, MSME growth and entrepreneurship development programs lack coherence. Even though strides have been made in Delhi over the years, more remains to be accomplished at the national scale if Indian businesses are to be more relevant in the world economy for global companies and stakeholders.
9. Impact of the Challenges MSMEs Face
Due to MSMEs’ low efficiency, mismanagement, and poor workplace conditions, growth has been difficult to achieve. Thus, the sector’s liquidity and profitability have slowed to levels that are incompatible with economic growth. There will be a considerable increase in the number of jobs created in India if the MSME sector is robust.
The MSME sector in India heavily relies on robust infrastructure, particularly within the outsourcing industry. Nevertheless, the insufficiency of infrastructure hampers their operational efficiency and global competitiveness, constraining the full realization of their growth prospects.
Ways to overcome problems faced by MSMEs
|Digital platforms and online marketplaces:- Numerous digital platforms and marketplaces play a crucial role in linking Micro, Small, and Medium Enterprises (MSMEs) with lenders, investors, and service providers.
Employing advanced technologies such as data analytics, artificial intelligence, and blockchain, these platforms evaluate the creditworthiness of MSMEs, align them with appropriate funding sources, and streamline transactions for quicker and more cost-effective processes.
One notable instance is Indifi, which leverages GST data and invoices to extend loans to MSMEs, exemplifying the efficient use of technology in the financial ecosystem.
|Limited access to information and awareness :- Many micro, small, and medium enterprises (MSMEs) frequently encounter challenges due to a lack of awareness regarding the diverse loan schemes and financial products tailored to their needs.
Additionally, they often struggle to identify appropriate lenders and intermediaries capable of providing guidance throughout the application process. To illustrate, a small-scale producer of leather goods might be unaware of government initiatives that provide subsidies, guarantees, or interest rate concessions specifically designed to support MSME loans.
|Elevated interest rates:- Small and Medium-sized Enterprises (MSMEs) often contend with comparatively higher interest rates and processing fees in contrast to larger enterprises. This discrepancy arises from the perceived elevated risk and lower creditworthiness associated with MSMEs, thereby amplifying their borrowing costs and diminishing overall profitability.
To illustrate, a medium-sized food processing unit might find itself obligated to pay a 15% per annum interest rate for a bank loan, whereas a large multinational corporation could secure a loan at a more favorable 8% per annum.
The MSME has several serious issues which necessitate an immediate response. The government is working hard to lay forward a plan for this industry that will help it overcome its many challenges and prosper. In India, there is a stimulus package of 3 lakh crores that allows MSMEs to get collateral-free loans from specified lenders. However, the plans are beset by serious problems that the authorities must address right away.