Strategy to ensure adequate and timely credit to Micro & Small Enterprises (MSEs) by banks

7th March, 2014

By Dr. Ipshita Guha



Micro and Small Enterprises are dotting the trade and commerce scenario in each and every corner of the world whether developed, developing or underdeveloped. They are literally the cornerstone of the economic fabric of a nation.

The sector not only delivers manufacturing output or services but creates immense job opportunities especially for unskilled people and women in rural and other backward areas. Thus, they provide the much needed economic independence for a better quality of life.

However, these MSEs do not have a smooth life themselves. In most cases they are like babies, resilient till either they grow stronger and prosper or die due to malnourishment or disease. Here the malnourishment or disease manifests in the form of inadequate credit or funds to channelize energy in the initial few years of existence.

In the entire scheme of things, there are three parties – the business entity itself, the banks and the government. They are all equally responsible for the dynamics of the sector and the prevailing issues.


Let us consider a brief at a glance picture of the sectors’ overall performance in the last few years to create a context for this paper.

There is a lot of gap in the data since much of the MSE segment is unorganized, scattered and continuously in a state of flux. Reports routinely highlight “26.1 million enterprises” but only 1.5 – 1.75 million are registered and properly accounted for. Much of these are micro units. This fragmented state of the sector is one of the key reasons attributed to constant lack of timely credit from banks. Partly it is true but this is only a one – sided argument. There are many contributory factors.

At inception, businesses need funds for everything from plant and machinery, furniture and fixtures, operating expenses, buying raw materials. MSEs start their venture with the owner’s capital and some amount of borrowed capital from family and friends. Often property mortgage or pledging of existing assets generates additional funds from banks or financial institutions. It is only in the later years do they receive structured capital and credit support from banks.


According to MSME sector Fourth census data (2006-07), around 5.2% (13 lakhs out of 261 lakhs) MSME firms have received any financial support from financial bodies. There is a huge credit gap. The reason is plainly that only this number of firms was granted credit after probably close to 95% of them seeking for support. The generalized reason is lack of creditworthiness of MSEs. This increases due to the inability to provide collateral assurance, poor management and business control.

There is a lot remaining to be done by public sector banks to support MSEs in India. A substantial portion of the support comes from small marginal localized scheduled banks as presented in Ministry of MSME, GOI’s 2012-13 Annual Report.

The prime question is can we blame the banks alone for this state of affairs? Whose money do these banks manage and lend? It is common man’s savings that have been deposited with the assurance of accessing it whenever one wants for any kind of needs. We do not have a social security system in India unlike many other countries. It is our savings that provide our security. Can we really blame our banks to be cautious and stingy and choosy while lending to firms just because they need the funds and credit? The sector is grossly unorganized which truly compounds the problem of granting credit. The census data is old and full of garbage. We do not know the exact size and shape of the sector. Most of the data and scenarios are based on assumptions and extrapolation. Companies are being setup and closed every other day for various reasons. Are we able to keep track of the same?


The government’s effort towards this sector is again haphazard and fragmented. Too many schemes and policies have been initiated but there is no review of the success percentage or effectiveness of each of them.

The severity of credit shortage is clearly evident to the people in power but very rarely are they seen discussing the same in any forum with clear numbers or conviction. The MSEs are not attractive to the political parties as the entire vote bank politics revolve around NREGA type schemes and Food Bill etc which honestly are a drain of our resources with no tangible returns.

The government’s performance also leaves a lot to be desired. Inspector Raj is anyway acting like a borer, too many taxes, compliances, reports to be submitted each month, clearances are riddled with corruption, there is no seriousness or strategy to gather MSE data about number of companies/ firms, established in, performance etc.

Business Entities

The biggest problem for MSEs is scarcity of information and guidance to avail various schemes and lending facilities provided by the government. Most of the firms do not understand clearly how to prepare papers and present their case to the financial institutions for their credit needs. CGTMSE scheme is grossly underutilized. The firms do not stress on their ability to repay loans through strong documentation as evidence. This is often a contributing factor in banks’ books where recoveries from MSEs are low. Such instances further caution the banks and prevent them from being enthusiastic and proactive about lending.

There is indeed another significant concern which is not voiced regularly in clear terms is the role of the business entities and the owners themselves in compounding the inadequacy of credit. It can be liberally stated that MSEs have clear issues of “corporate governance.” There are too many holes in the firms which raise red flags when banks try to evaluate them.

It is commonly seen that small business owners often squander their earnings in buying flashy cars, funding foreign trips or home/ office purchase or renovation as soon as some funds start flowing in. They do not focus on becoming independent and cash rich improving the liquidity of the business. There are too many irrational expenses and all billed to the firm thus reducing profits and taxes. The CA’s are often complicit in such cases. The books are invariably cooked at times and banks are also aware of this. CAs cannot be entirely blamed. They are service providers. How we avail their services shows our competence. Rarely would you find owners asking CAs to strategize for the company. Rather the questions focus on whether certain arbitrary expenses can be billed to the company or how the data can be fudged to lower taxation and channelize funds to other avenues. In the short term, it helps but then the firms stumble while seeking bank funding. This short-sightedness of firms compromise their repaying ability and the seriousness of managing the firm as a true business entity. The general condition of the sector thus diminishes the chances of firms that are run honestly with full transparency.

The focus today is what should be done to resolve the credit availability concern.


We need a clear plan of action to resolve the credit crisis.



Micro and Small Enterprises


The best of plans can go awry if not executed properly with dedication and seriousness.


Most of the above can be implemented in a short span of 3-6 months.



The crux of the problem can be understood and resolved if all three parties concentrate on the quote by Chanakya –

Before you start some work, always ask yourself three questions – Why am I doing it, What the results might be and Will I be successful. Only when you think deeply and find satisfactory answers to these questions, go ahead.