Necessity of Bank Credit to MSMEs
Micro, Small & Medium Enterprises sector constitute the growth engine of the country’s economy It account for almost 45% of manufacturing output, 95% of the number of industrial unit, 40% of the export and provide employment to almost 60 million people making it largest source of employment after the agriculture sector. The MSMEs lead to entrepreneurial development and diversification of the industrial sector, and also provide depth to industrial base of the economy. More employment opportunities are generated and the capital cost per employee is low. With the Services sector dominating the MSME, and MNCs outsourcing their various requirements to Indian service providers, the scope for MSME finance has increased even further.
There is also a more favourable environment now with the Govt. committed to give fillip to this sector through infrastructure development, skill set development/entrepreneurship development, technology upgradation etc,. MSMEs have been quite enthusiastic after the dismantling of the textiles quota. Other sectors like IT and IT-enabled services, bio-tech, footwear etc,. have also shown promising potential. With the deregulation of the financial sector, the general ability of the banks to service the credit requirements of the MSME sector depends on the underlying transaction costs, efficient recovery processes and available security. There is an immediate need for the banks generally to focus on credit and finance requirements of MSMEs. Although the banks are allowed to fix their own targets for funding MSMEs they are advised to achieve a 20% year – on – year growth in credit to micro and small enterprises and a 10% annual growth in the number of micro enterprise accounts. Also, Credit risk in the MSME sector is widely dispersed and Banks get better yield from MSME advances as against the traditional advances where the spread is getting gradually reduced. The MSME clientele base could also be utilised by the Branches to step-up “cross selling” of various other products including technology-enabled products.
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