Top 5 Challenges of MSME Loans

Over the previous few decades, the Indian MSME (micro, small, and medium enterprises) industry has been one of the crucial contributors to the country’s economy. MSMEs generate mass employment in every part of India and are critical to the country’s progress. Given its importance, the Government of India offers support and assistance through various programmes to guarantee that MSMEs’ growth continues unchecked, mainly through MSME loans, especially amid a pandemic that has brought major world economies to a halt. Despite its considerable economic contribution and support from the Government, the absence of sufficient and timely access to MSME loans and finances still remains the most significant test for this sector, which has obstructed its development. 

The following are the key challenges that MSMEs face concerning obtaining MSME loans:

  1. MSME Loans Collateral

Irrespective of the Government’s efforts to make credit for companies more freely available to stimulate entrepreneurship, many businesses experience difficulties getting funding or obtaining an MSME loan. Due to a strict collateral policy by the lending institutions in offering MSME loans, small businesses may find it challenging to secure an MSME loan. Small businesses can lack the necessary assets to justify obtaining an MSME loan. For instance, many MSME industries include regional crafts such as hand looms, arts, marble, stonework, etc. Though these industries are gaining traction in the international market as well, the banking institutions do not come forward in providing the required assistance through MSME loans to such businesses, given their small infrastructure and capital investment.

Another critical issue is the economic slowdown, which has resulted in a liquidity shortage. Considering the consequences of Covid-19, the MSME sector faced a serious decline in their revenue generation, thus threatening the fate of micro and small businesses. The industry witnessed a huge decrease in demand and liquidity crunch. In such a scenario, the MSME loan application process for acquiring small company loans became more inconvenient. This financing option is not practical when the small companies need MSME loans urgently to satisfy working capital requirements for their survival.

  1. Lack of Modern Financing Options

There are significant regulatory gaps in accessing various financial aid programmes given by the Indian Government. Most MSMEs face fundamental financing challenges in the early phases of their business venture. MSME loans disbursements are further hampered by gaps in the regulatory mechanisms that cause delays in obtaining licenses, insurances, certifications, and numerous compliance requirements. In addition, given the lack of trust and unfamiliarity with technology, many small firms do not employ tech-based commercial transactions.

The traditional lenders have also not adapted to the capabilities and requirements of MSMEs in recent times. They demand business owners fulfil stringent qualifying requirements and provide a slew of documentation. Unlike the MSME loans, their loan options are not flexible regarding the payment structure and period. Such lenders generally ask for an immovable property as the collateral for the loans, thereby shutting possible options for MSMEs to seek financial assistance.

  1. Lack of Financial Literacy

Many MSME business owners lack the financial literacy to make appropriate business decisions as they devise new strategies and plan the development of their existing businesses. This frequently results in unbalanced working capital ratios and poor credit scores. MSME entrepreneurs’ lacking fundamental financial expertise may be unable to make critical business decisions with financing, for instance, selecting an appropriate loan structure while applying for MSME loans. Higher interest rates on small company loans result from failing to choose the correct lender. This finance-related knowledge is vital since the business owners need to rely on an MSME loan to get through any difficulties that may arise at any time. Without financial expertise, one can make bad judgments that can cost the business a tremendous amount of money. Furthermore, they are out of touch with the most recent financial innovations used by many NBFCs and internet lenders. As a result, both the public and private sectors must ensure that MSMEs seeking business financing and MSME loans are updated on financial matters.

As a result, it’s critical to grasp everything about MSME loans, learn about MSME loan interest rates, and compare them to the market before taking out a loan.

  1. Lending Institutions Lack Trust in granting MSME loans

Banks are hesitant to issue MSME loans since the capital requirements remain small, and they question MSMEs’ repayment abilities. Banks end up enacting stricter criteria on start-ups to give MSME loans due to this predicament. Furthermore, because MSMEs are likely to have no credit history, they are considered high-risk borrowers for the MSME loans; thus, the financial institutions have to consistently monitor and engage with MSMEs throughout the repayment period of the MSME loans. They consider it a high cost for their business. In addition, businesses generally fail to maintain their credit ratings, thus affecting their ability to obtain an MSME loan. Also, the lengthy MSME loan approval process further adds to the discontent of small business owners.

  1. Outdated technologies

Despite government initiatives and the emergence of the FinTech business, most MSME businesses remain untouched by technological advancements and legal developments, particularly in rural areas. MSMEs are further hindered by obsolete technologies and a lack of skilled workforce when presenting compelling reasons for funding and obtaining MSME loans. Due to a shortage of capital, most firms have issues with production, timely raw material purchases, and even access to new technology or the acquisition of new skills. 

As a result, MSMEs must be aware of technological advancements essential to their success. Research institutes must be associated with local MSME clusters and pay attention to their technology-related difficulties and issues. Regulation improvements will not help its intended MSME targets as long as inefficiencies and disparities prevail in the system.

Simpler MSME loan mechanism for the win!

The importance of MSMEs in the Indian economy is indisputable. Through national and international trade and commerce, the Indian MSMEs sector contributes up to 29% to the GDP. On the other hand, inclusive and long-term growth has always been a difficulty for this sector. The growth of Indian entrepreneurs remains hindered by excessive debt and strict MSME loan policies. While the support from the Indian Government has been of paramount importance in lifting the MSME sector to new heights, introducing another phase of more robust regulations and changes in the right direction in offering MSME loans would place the MSME sector as an indispensable pillar of the Indian economy.


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