AsiaBusinessIndiaSouthern Asia

World Bank Clears US 500 Mn Loan for MSME Sector

From Our Economic Correspondent

New Delhi, March 02, 2015  The World Bank today approved a US $ 500 million loan for the MSME Growth Innovation and Inclusive Finance Project to improve access to finance for Micro, Small and Medium Enterprises (MSMEs) working in the manufacturing and services sector at an early stage.

The project will support MSMEs [1] through direct financing by the Small Industries Development Bank of India or SIDBI, an apex financing institute, as also through Participating Financial Institutions or PFIs [2] , across three components. These include support to startup debt financing and risk capital as well as support to service and manufacturing sector financing models.

With eight million people entering the labor force every year, MSMEs have the potential to create many new, innovative jobs. However, for these ideas to take shape, MSMEs will need easier access to finance. This project will develop innovative products that address such constraints and help them achieve their true potential, said Onno Ruhl, World Bank Country Director in India.

The project will develop SIDBI s ability to scale up debt financing as India s startup ecosystem is currently one of the fastest growing in the world. In the last 3 years, India s start-ups have attracted some 300 venture capital/private equity and 225 angel investment deals worth over US $ 2.3 billion and over 20 mergers and acquisitions worth US $1 billion. It is currently the third largest startup base in the world with 3,100 startups (after the United States with 41,500 start-ups and the United Kingdom with 4,000). India has the potential to build around 2,500 highly scalable businesses that could generate revenues of US $158 billion in the next 10 years.

In India, MSMEs account for more than 80 % of total industrial enterprises, produce over 8000 value-added products and employ an estimated 60 million people. It contributes around 45 %  to manufacturing output and about 40 %  to exports, both directly and indirectly. In addition, over 50 % of MSMEs are rural enterprises and widely distributed across low-income states making them an important sector for promoting economic growth and poverty reduction.

However, lack of adequate finance is one of the biggest challenges facing the MSME sector. Financial institutions have limited their exposure to the sector due to a higher risk perception, information asymmetry, high transaction costs and the lack of collateral. The MSME census of 2006-07 estimated that about 87 percent of MSMEs did not have any access to finance and were self-financed. Credit towards micro and small enterprises represent only around 13-15 percent of formal financial institutions portfolio.

The service sector enterprises continue to face challenges in accessing formal finance. In an attempt to address this issue SIDBI introduced four new products in 2013. These included: the Secured Business Loans for MSMEs, the Scheme for Asset Backed assistance to service sector entities, the Scheme for Facilitating Payments to MSMEs in Construction sector, and the Scheme for Asset Light assistance. Considering their potential to grow, this project will support scale up of similar products for service sector MSMEs.

The project will also support manufacturing MSMEs through financial products such as Loan Extension Services (LES) and cluster financing — including women-led clusters. Particular focus will be to expand manufacturing activity in financially underserved areas, including low income states especially through refinancing, as banks and other PFIs have a deeper network in these states.

Access to formal financing is challenging as financial institutions are yet to develop appropriate risk assessment frameworks to assess enterprises that fall under the MSME sector. Traditional banking based on collateral lending does not cater well to these large, innovative and dynamic segments of the Indian economy. Thus, despite its contribution to GDP, its potential is not fully realized and many firms are unable to grow sufficiently. The introduction of customized products with innovative financing mechanisms will help unlock the market for lending to MSMEs at all stages of growth, said Niraj Verma, Lead Financial Sector Specialist and the Task Team Leader for the project.

The loan, from the International Bank for Reconstruction and Development (IBRD), has a 5-year grace period, and a maturity of 18 years.

Related posts