VEER NARMAD SOUTH GUJARAT UNIVERSITY

COURSE: B.B.A

YEAR: F.Y. BBA-SEM –II

Management of MSMEs

Unit 2: Challenges and Opportunities of MSMEs (35%)

Advantages of MSMEs and their role and significance in economic development, Role of
Government in promoting SSI in India, Policies for MSMEs and Scope of MSMEs in India,
Challenges and Opportunities of MSMEs in the current scenario, Problems of and Prospects of
SSI/ MSMEs, Performance of MSME/ SSI Sector, Pattern of Growth of MSMEs..

❖ Advantages of MSMEs

MSME (Micro, Small and Medium Enterprises) are the business entities that drive our
economy at the most basic level and contribute to its growth. In a developing country like
India, MSMEs are the backbone of the economy and contribute largely in the socio-economic
development of the country. The government has always encouraged small and medium
industries and always been in favor of providing benefits to them. That’s why there are many
benefits of MSME registration. There are many benefits of MSME registration in India,
which can be only availed if the business had registered itself as an MSME/SSI under MSME
Act. As per revised definition, MSMEs are classified in two categories, such as
manufacturing and service enterprises.

Advantages of MSME

1. Collateral Free Loan Facilities and Priority Lending

2. Credit Linked Capital Subsidies for MSMEs
3. Low Interest Rate on Loan
4. ISO Certification Charges Reimbursement
5. Incubation Scheme for MSME
6. Market Development Assistance Scheme for MSME

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 7. Subsidy on Patent Registration
8. Protection against Delayed Payments
9. 100% tax exemption for Innovative Startups
10. Concessions on Electricity Bills
11. Tender Preference to MSME
12. Prime Minister Employment Generation Programmes for MSMEs

1. Collateral-Free Loan Facilities & Priority Lending:

To provide relief to millions of small businesses reeling under the impact of Covid-19 and
lockdown in the country, Finance Minister has announced Rs 3 lakh crore collateral-free
automatic loans. These loans will have 4 year tenure and 100 percent guaranteed. It has
moratorium for 4 months and the scheme can be availed till October 31, 2020. This is
expected to benefit 45 lakh units, allowing them to resume activity and safeguarding jobs.
Banks and NBFCs will offer up to 20 per cent of entire outstanding credit as on February 29,
2020, to MSMEs. Units with upto Rs 25 crore outstanding credit and Rs 100 crore turnover
are eligible for taking these loans. In present scenario, it is most popular benefits of MSME
registration. Govt will also provide equity support to stressed MSMEs and facilitated the
provision of Rs. 20,000 crore as subordinate debt. Under this scheme promoters of the
MSME will get loan by the banks, which will be infused by promoter as equity in the MSME
Unit. Subordinated debt facility will aid 2 lakh stressed MSMEs.
There is also a Rs 50,000 crore equity infusion for MSMEs through Fund of Funds; to be
operated through a Mother Fund and few daughter funds; this will help to expand MSME in
size as well as capacity.

2. Credit Linked Capital Subsidies for MSMEs:

Technology-driven MSMEs may not be able to use their resources to full potential due to
lack of the latest technology. Under this scheme, MSMEs are provided upgraded technology
to replace their old and obsolete ones. The Scheme aims to provide 15% capital subsidy for
technology upgradations. There is also a ceiling in 15% capital subsidy which is 15 Lakh for
induction of well established and improved technology. It is given for in approved sub-
sectors/products.
3. Low Interest rate on loan:
Businesses or enterprises after obtaining MSME registration certificate can avail a benefit of
1% on the Overdraft loan and as per Union budget 2019 MSMEs registered under GST can

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get 2% interest subvention. It is available for incremental loans of Rs 1 crores under the
MSME Credit Scheme.

4. ISO Certification Charges Reimbursement:

There has been given relaxations to MSMEs from all expenses incurred for obtaining ISO
9000, ISO 14001, and HACCP certifications. It will promote the standards and certifications
in order to enhance their performance across sectors.

5. Incubation Scheme For MSME:

The incubation scheme has been launched in May 2019 to provides opportunity to the
innovators in developing their new innovative ideas for the creation of new innovative
products. Nature of assistance are as follows:
• Under this scheme financial assistance up to 15 lakh is provided for developing and
nurturing of an idea. Financial assistance up to 1.00 Cr. is provided for procurement and
installation of Plant and Machines in BI. This will strengthen the technology-related R&D
activities of BI.
• Financial assistance of up to 1.00 Cr. provided as grants in aid for the seed capital support
to HIs/BIs for promoting them to converting their ideas into start-ups.

6. Market Development Assistance Scheme for MSME:

Under this scheme, The Central Government follows a Price and Purchase Preference policy
Wherein around 358 items are listed for exclusive purchases by Central Government from the
MSME units only. They are numerous support like marketing assistance even for those
products, which are manufactured by MSMEs and do not fall under the purview of
Reservation Policy.

7. Subsidy on Patent Registration:

More than 50% subsidy is given to the Enterprise that has the certificate of registration
granted by MSME. Fees for patent registration for MSMEs has been reduced to Rs 1,600 or
Rs 1,750 from Rs 4,000 or Rs 4,400 respectively. For expedited examination, it is reduced to
Rs 8,000 from Rs 25,000 earlier. Similarly, for renewal of patents, the fees has been reduced.
For design applications filing, fees for MSMEs and startups has been reduced to Rs 1,000
from Rs 2,000.

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8. Protection against Delayed Payments:
At times, the buyers of services or products from the MSME’s or Small Scale Industries tend
to delay the payment. MSME ministry provided a helping hand to such enterprises by giving
them the right to collect interest on the late payments from buyers. The settlement will be
done through conciliation and arbitration and it will be resolved in minimum time.
Payment term are provided under this rules are-
1. On or before the agreed date of payment or
2. In case there is no mention of the date of payment, within 15 days from the day
they had accepted the goods and services from MSME or SCI registered business.

The Micro, Small and Medium Enterprises Development Act, 2006, has made strict
provisions for charging of interest so that problem of delayed payment can be mitigated. In
these provisions, if any buyer fails to make payment to MSMEs as per agreed terms or a
maximum of 45 days, Buyer need to pay monthly compounded interest which is three times
of the rate notified by the Reserve Bank of India.

9. 100% tax exemption for Innovative startups:

No Income Tax required to be paid in 3 year out of 7 Years – ie. Startups are eligible for
getting 100% tax exemption on profit for a period of three years in a block of seven years
provided that annual turnover does not exceed Rs 25 crores in any financial year. It is
Allowed by way of Deduction under Income Tax Act. In this deduction, Companies upto 10
Years in existence are still considered startup. Income Tax Law also allows credit for
minimum alternate tax (MAT) to be carried forward for up to 15 years instead of 10 years.

10. Concessions on Electricity Bills:

Government has provided relief to registered MSMEs in electricity bills. For taking this
benefits unit must have MSME registration and they have to make an application to the
department of the electricity along with the MSME registration certificate.

11. Tender Preference to MSME:

From time to time government has announced many tenders where only MSME Industries
can apply. Recently, as a part of Covid-19 relief package, the Finance minister has announced

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that there are issues of unfair competition from foreign companies in government
procurement tenders due to the size and strength differ and government will not allow global
tenders in such schemes up to Rs 200 crore.

12. Prime Minister Employment Generation Programme for MSMEs:

This scheme provides a subsidy for Employment Generation. The national-level nodal agency
is Khadi and Village Industries Commission (KVIC) and it implements the scheme at
national level. At the State level it is implemented through State KVIC Directorates, State
Khadi and Village Industries Boards, District Industries Centres and banks. The Government
subsidy under the Scheme is routed by KVIC through the partner banks for distribution to the
entrepreneurs directly in their Bank accounts.

❖ Role of MSMEs in Indian Economy

Since its formation, the MSME segment has proven to be a highly dynamic Indian economy
sector. MSMEs produce and manufacture a variety of products for both domestic as well as
international markets. They have helped promote the growth and development of khadi,
village, and coir industries. They have collaborated and worked with the concerned
ministries, state governments, and stakeholders towards the upbringing of rural areas.
This article is based on “Liquidity lifeline: On Nirmala’s MSME package” which was
published in The Hindu on 14/05/2020. It talks about the challenges of and steps to be taken
to revive the MSMEs sector.

In order to revive the Indian economy amid Covid-19 pandemic, the government has
announced an economic package under Atmanirbhar Bharat Abhiyan. The main thrust of the
announcements has been the massive ₹3-lakh crore collateral-free assistance or sovereign
credit guarantee to the Micro, small and medium enterprises (MSMEs). Like other sectors of
the Indian economy, MSMEs have been hit badly due to lockdown imposed by the
government to tackle Covid-19 pandemic. However, even before the current crisis, MSMEs
growth has been marred by several challenges. In such a situation, providing merely a
stimulus package may not be effective, until adequate reforms are carried out to solve its
pressing problems and to utilize its potential.

Reason for Giving Credit Guarantees : A credit guarantee by the government helps as it
assures the bank that its loan will be repaid by the government in case the MSME falters.

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Efforts to pump liquidity via the bank have not been successful in the past, because banks
simply do not want to lend any new money. Banks, quite justifiably, suspect that any new
loans will only add to their growing mountain of non-performing assets. So the issue was
banks had the money but were not willing to lend to the credit starved sections of the
economy. Thus, as part of the solution, credit guarantees are chosen by the government.

MSMEs have played an essential role in providing employment opportunities in rural areas.
They have helped in the industrialization of these areas with a low capital cost compared to
the large industries. Acting as a complementary unit to large sectors, the MSME sector has
enormously contributed to its socio-economic development.

MSMEs also contribute and play an essential role in the country’s development in different
areas like the requirement of low investment, flexibility in operations, mobility through the
locations, low rate of imports, and a high contribution to domestic production.

With the capability and capacity to develop appropriate local technology, provide fierce
competition in domestic and international markets, technology-savvy industries, a
contribution towards creating defence materials, and generating new entrepreneurs by
providing knowledge, training, and skill up-gradation through specialized training centres.
The MSMEs constitute over 90% of total enterprises in most of the economies and are
credited with generating the highest rates of employment growth and account for a major
share of industrial production and exports. The MSMEs play a vital role in the overall
growth of industrial economy of the country.

❖ Significance of MSMEs in Economic development

The significance of the MSMEs sector can be noted from the fact that it is the second largest
employment provider, after agriculture in India. 1/5 In India, at present, there are nearly 56
million such enterprises in various industries, employing close to 124 million people. Of
these, nearly 14% are women-led enterprises, and close to 60% are based in rural areas. In all,
the MSME sector accounts for 8% of India’s GDP and 45% of merchandise exports. Due to
this, the MSME sector is called the growth engine of the nation

Importance of MSME ACT 2006:

With the introduction of the MSME Act in the year 2006, the service sector that was not yet
included in this sector was included in the definition of the Micro, Small & Medium sized

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Enterprises making a historic change to this Act, thus leveraging the scope of the sector even
now government simplified the MSME Registration Online with the paperless work.
Let us take a look at some of the key importance of this sector in the development of India
both in terms of economic, and social development:

1. Creates large scale employment:

Since the enterprises falling in this sector require low capital to start the business, it creates
huge employment opportunities for many unemployed youths. India produces about 1.2
million graduates per year, of the total number about 0.8 million are engineers. And, there is
no economy in the world that can provide jobs to so many fresh graduates in one year.
MSME is the boon for many of these fresh manpower.

2. Economic stability in terms of Growth and leverage Exports:

MSME is a significant growth driver in India, with it contributing to the tune of 8% to GDP.
As mentioned in the table, Exports sector in India constitutes about 40% of contribution from
MSME alone. Looking at the kind of contribution of MSME to manufacturing, exports and
employment, other sectors are also benefitting from MSME. MNCs today are buying semi-
finished, and auxiliary products from small enterprises, for example, buying of clutches, and
brakes by automobile companies. It helps create a linkage between MSME and big
companies. Even after the implementation of the GST 40% MSME sector also applied GST
Registration which increase the government revenue by 11%.

3. Encourages Inclusive Growth:

About 50% of wealth in India in owned by just 100 people which is due to unequal
distribution of wealth. Inclusive growth is on top of the agenda of Ministry for Medium, and
Small, and Medium sized enterprises for several years. While poverty and deprivation are a
deterrent to the development of India, including marginalized sections of society is a key
challenge lying before the Ministry of MSME.

4. Cheap Labor and minimum overhead:

In large scale organizations, one of the key challenges is to retain the human resource through
an effective human resource management professional manager. But in case of an MSME,
the requirement of labour is less, and it does not need a highly skilled labourer. Hence, the
indirect expenses incurred by the owner is also low.

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5. Simple Management Structure for Enterprises:
MSMEs do not require a huge capital to start. With limited resources available within the
control of the owner, decision-making becomes easy and efficient. As in case of a large
corporation wherein a specialist is required for every departmental functioning because of
complex organizational structure, a small enterprise does not need to hire an external
specialist for its management. The owner himself/herself can manage it. Therefore, it can be
run single-handedly.

6. Plays an important role in making “Make in India” possible:

Post the inception of ‘Make in India’, a signature initiative by the prime minister of India, the
process of incorporating a new business has been made easy. Since the MSME is the
backbone in making this dream a possibility, the government has directed the financial
institution to lend more credit to enterprises in MSME sector.

Final Conclusion on MSME Sector:

Micro, Small and Medium-sized Enterprises (MSME) are one among the most important
sectors, forming the backbone of the Indian economy. This sector has been instrumental in
the growth of the nation, leveraging exports, creating huge employment opportunities for the
unskilled, fresh graduates, and the underemployed, also extending the opportunities to banks
for giving more credit to enterprises in this sector. The government should take utmost care
of this sector in terms of providing more and more MSME Registration benefits through
better regulations, Government simply, and enabling financial institutions to lend more credit
at less interest rate for sustainability of this sector.

❖ Role of Government in Promoting Small Business

Helping small businesses start and thrive is a win-win situation for the government. Local
businesses help support the tax base through businesses taxes and through the wages
provided to employees. The possibility of workforce expansion and economic growth
prompts municipalities, counties, states and the federal government to offer various forms of
assistance, such as grants, research opportunities, beneficial legislation and worker training
programs. To find out what services are available in your area, contact your state and local
economic development offices and ask about business incentives in your area.

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1. Economic Development Programs:
Some government programs help businesses start, grow and relocate to specific areas. In
some ways, local, county and state governments compete with each other for jobs. They
do this by offering start-up incentives and taking steps to create a “business-friendly”
environment. These steps include tax credits, worker training, free land, zoning changes,
low-interest loans, infrastructure improvements and help with fast-tracking licensing and
permitting.
2. Loan Guarantee Programs:
Government agencies such as the U.S. Small Business Administration provide loan
guarantees to small businesses and encourage local banks to work with start-ups or
established companies that want to expand. Talk to your banker about state or federal
loan programs that offer low interest rates. If you are a woman, minority or operate a
business in select industries, additional loan opportunities also may be available. Contact
your state's economic development office to learn if it has loan programs.
3. Research and Development:
The federal government provides grants to academic institutions working to develop new
technologies that will benefit industry with the caveat that the institutions share the
technologies with industry. In some instances, the government provides grants to private
companies making a new product or service that will improve a vital area of an economy,
such as transportation, energy, agriculture or communications. Some states also fund
research and development projects and work with private investors and the federal
government to raise funds.
4. Infrastructure Improvement Funding:
Business does better when it can move raw materials to factories efficiently and get
finished goods to plants and markets quickly. Governments help improve the
infrastructure needed for businesses to succeed. This includes building and maintaining
roads, bridges, rail lines, airports, seaports, and energy transmission lines and
telecommunications systems.
5. Education and Training Programs:
To ensure businesses have access to trained workers, governments provide free schooling
for primary and secondary students, grants and loans for higher education and worker
training programs. Governments often work with trade schools, community colleges and
universities to provide free worker training.

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 ❖ Policies for MSME
1. Cluster Based Approach:
A Cluster based approach to lending – (Ganguly Committee on SSI, 2004) is more
beneficial :
• In dealing with well-defined and recognised groups;
• Availability of more information for risk assessment;
• Monitoring by lending institutions.
SLBC convener banks have been advised to incorporate in the Annual Credit Plan, the credit
requirements in the clusters identified by Ministry of MSME Enterprises.
Prime Minister’s Task Force recommended: banks should open more MSE focussed
branches; each lead bank may adopt at least on MSE cluster.
2. Empowered Committee on MSMEs:
At the Regional Offices of RBI, empowered committee has been constituted with
Regional Director as Chairman.
Other members: the SLBC Convener, senior officers from two banks, Director of
Industries, of the State Government, representative from MSME Association.
The Committee reviews the progress in MSME Financing, rehabilitation of sick SME
units and co- ordinate for smooth flow of credit to the sector.
3. Scheme of Small Enterprises Financial Centre (SEFC):
As announced by Governor in Annual Policy Statement 2005-06, a scheme for strategic
alliance between banks and SIDBI located in clusters named “Small Enterprises Financial
Centre” has been implemented, for co-ordinated approach.
As on date, SIDBI executed MOU with 15 banks.
4. Credit Linked Capital Subsidy Scheme (CLSS):
Government of India Scheme for Technological up gradation of Micro and Small
enterprises Scheme:
• Rate of subsidy @ 15 % for all units of MSE up to loan of Rs 1.00 crore.
• Computation of subsidy on the purchase price of plant and machinery.
• SIDBI and NABARD: implementing agencies.
5. Credit Guarantee Scheme for MSEs:
Government of India and SIDBI set up the Credit Guarantee Fund Trust for Micro and
Small Enterprises (CGTMSE) in 2000.

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 The WG to review the working of the Credit Guarantee Scheme (CGS) of CGTMSE g
Chairman V.K.Sharma).
The Group recommended for doubling the collateral free loans to MSEs sector from Rs
5.00m lakh to Rs 10.00 lakh. ( RBI Circular issued in May 2010)
6. Micro Units Development and Refinance Agency ( MUDRA) Bank :
Launched by Prime Minister on April 8, 2015 and Union Finance Minister in his Budget
speech 2015-16 announced formation of MUDRA Bank.
There are 5.77 crore small business units, mostly individual proprietorship, which run
small manufacturing, trading and service business.
These bottoms of pyramid find it difficult for access of credit.
MUDRA will ‘fund the unfunded’ MUDRA has been registered as an NBFC, with
RBI.

Objectives of MUDRA

• To be an integrated financial and service provider for micro enterprises.

• Creating a good architecture of Last Mile Financiers to micro business After ‘banking
the unbanked’ with Jan Dhan Yojana it’s time to ‘ fund the unfunded’.

New Policy Initiatives

Trade Receivables Discount System (TReDS) of MSMEs : RBI guidelines December 3,

2014

Institutional mechanism to facilitate the financing of trade receivables of MSMEs from

Corporate and other buyers (including Government Departments, PSUs), through multiple
financiers.

The transactions processed under TReDS will be “without recourse” to the MSMEs.

❖ Scope of MSME in India

The Micro, Small and Medium Enterprises (MSME) sector is believed to be a vibrant sector
for the Indian economy, as it a vital tool for nurturing entrepreneurship and for creating
employment opportunities, It have been contributing significantly to the expansion of
entrepreneurial endeavors through business novelty and also to the socio-economic
development of the Country.

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The MSMED Act, 2006, has extended the scope of MSME sector in the country, more
comprehensively it has put a formalized process into practice for developing and enhancing
competitiveness of the MSME sector, via ensuring Government procurement to products and
services, providing flexible credit facilities, enhancing various concessional facilities,
attempting to deal with the issues of delayed payments, etc. The MSMEs are also extending
their sphere across sectors of the economy, producing a varied range of products and services
to meet demands of domestic as well as global markets.

Thus, we can say that there is much for the MSMEs in the near future, as the Government is
making all its efforts to encourage entrepreneurship, employment and livelihood
opportunities to enhance the competitiveness of MSMEs in the country and across the globe.
There is a lot of scope for diversification in the Micro Small and Medium Enterprises
(MSME) sector, said Nitin Gadkari, Union Minister for MSME. He stated, “Honey
production, bamboo, bio-fuel production, fisheries, dairy, Agarbatti making, hydroponics,
water transport like Ro-Ro, Ro-Pax, e-transport, mechanized fishing trawlers etc. can be new
areas for such ventures.”

The present Government under the leadership of Prime Minister Narendra Modi is looking at
this sector as a major growth engine and source of generating employment, he added. “The
sector gives employment to about 11 Crore people currently, we will take this to 15 crore in
the next 5 years. The government aims to generate 50 lakh jobs through Khadi. Added, that
focus will be on 115 aspirational districts”, said Gadkari. To achieve this, he stated “We need
to create new channels for funding, make the sector investor friendly, bring in technological
innovations, and reduce logistics cost to make our products competitive, provide adequate
skilling and market support.”

While highlighting importance of technology and innovation, he emphasized upon reduction

of cost for logistics where he sighted example of use of waterways and promoting electric
and bio fuels instead of diesel vehicles to bring down logistics costs. Further, told that
Government is also looking at import substitution.

He also called upon stakeholders to suggest ways and means to cut down red-tapeism and
also told that the Ministry is working to build Bank of Ideas and Innovations wherein all
stakeholders should contribute.

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In addition, he stated that the Government is developing an e-market portal like Alibaba,
which will be called as Bharat Craft. This will provide a direct interface between buyers and
sellers. In the next 2-3 years this portal will bring a turnover of about Rs 10 lakh crore to the
MSME sector.

Extending a lifeline to India’s struggling micro, small and medium enterprises (MSMEs),
which are badly hit by the nationwide lockdown due to the Covid-19 pandemic, the Union
Cabinet approved tweaking the definition of MSMEs in such a way that more companies
can claim the benefits available for small businesses.

The Cabinet Committee on Economic Affairs (CCEA), chaired by Prime Minister

Narendra Modi, also approved provisioning of Rs 20,000 crore as subordinated debt
(unsecured loan) to provide equity support to stressed MSMEs.

In other decisions, the Cabinet also cleared equity infusion of Rs 50,000 crore for small
scale units through a Fund of Funds, which will help MSMEs to be listed and be able to
raise funds from the market. According to the new definitions, MSMEs with an investment
of Rs 1 crore and turnover of Rs 5 crore will be classified as micro-units, units with an
investment of Rs 10 crore and turnover of Rs 50 crore as small units and those with
investment of Rs 50 crore and turnover of up to Rs 250 crore as medium units.

The policy change was already announced by Finance Minister Nirmala Sitharaman as part
of AtmaNirbhar Bharat package. While the FM had proposed definition for medium
enterprises as companies with investment up to Rs 20 crore and turnover of Rs 100 crore,
companies requested her to enhance it further, which has now been accepted.

“This will help in attracting investments and creating more jobs in the MSME sector,” an
official statement said. Nitin Gadkari, Union minister for MSMEs, said the sector is very
critical for the economy and 60 million MSMEs contribute as much as 29% to India’s
GDP, 48% of total exports, and generate 110 million jobs.

Exporters welcomed the move saying the change in definition will not only help in ease of
doing business, but also attract more investment.

“Excluding exports turnover from total turnover will help in internationalisation of MSME
and will bring their focus on exports. This will also benefit a lot of gems and jewellery
companies, which would have breached the MSME criteria due to the sheer cost of their
inputs,” said Sharad Kumar Saraf, president, Federation of Indian Export Organisations.

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Loans for vendors: The Cabinet also cleared Pradhan Mantri Street Vendor’s
AtmaNirbhar Nidhi, under which street vendors can avail working capital loan of Rs
10,000 each, repayable over one year.

❖ Challenges in the MSME sector in the current scenario

Despite the MSME sector contributing significantly to the economy, it continues to face
several challenges. Let me now elaborate on some of these issues.
First three points are addressed by Shri Shaktikanta Das, Governor, Reserve Bank of India at
the 15th ASSOCHAM Annual Banking Summit, March 6, 2020
1. Infrastructure bottlenecks and competition:
Notwithstanding various efforts to upgrade the infrastructure, the MSME clusters,
particularly the micro enterprises, are inadequately equipped with necessary support systems
which not only impede their day to-day business operations but also their future growth
prospects. While infrastructure constraint is only one side of the story, MSMEs also need to
do their bit to improve competitiveness. They need to shed their inhibition to adopt new
technologies; accept e-payments; and foster in-house innovation which will help them
manage their businesses digitally and compete globally. Given the current scenario of global
trade, the age-old methods of operating business with low levels of technology adoption
deprives them of potential economies of scale. Lack of expertise in product development,
designing, packaging and marketing strategy due to their small size add up to the pressure of
adapting to the changing environment around them.
2. Access to Credit and Formalisation:
Credit plays a vital role in development of MSME sector as funds at a reasonable cost can
increase their competitiveness. Credit disbursal to this sector has, however, remained sluggish
in recent periods. At an aggregate level, the total credit outstanding from banks and NBFCs
to the MSME sector was approximately ₹16.6 lakh crore as at end of September, 2019.
Scheduled commercial banks account for 90 per cent of the share of total credit outstanding.
As many MSMEs mainly operate in the informal space, assessing their creditworthiness can
be difficult due to information asymmetry, particularly with respect to the financial
performance of their businesses.
3. Delayed Payments:
A large number of MSMEs are ancillary units catering to the needs of large industries, both
in the public and private sector. They often face the problem of delayed payments, affecting

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their cash flow and working capital availability. Most of the time, delay in realisation of such
receivables increases their operating cycle and reduces their ability to procure new orders or
fulfil the existing ones. A primary survey conducted by Reserve Bank in December 2019
showed that 44 per cent of MSMEs engaged in manufacturing activities faced delay in
payments. The ones not receiving timely payment mainly belonged to basic metal and metal
products, engineering, construction and infrastructure related industries.
4. Inadequate access to market:
MSMEs in India have struggled to have access to wide markets for various reasons like, lack
of adequate capital, inadequate use of marketing tools, and lack of awareness of larger
economic environment. They have not been able to scale the business for want of access
across the domestic and the global market. The case continues to be so capping the growth
potential.
All the businesses primarily need adequate fund and marketing backup to succeed in the
competitive market. Hence, the Government has launched the Udyog Aadhar Memorandum
for the smooth promotion of the MSME businesses.
It is like the Indian Aadhar Card giving identity to the MSME businesses and allowing
smaller businesses smooth access to necessary services like reduced cost patency, tax rebates,
and loans at low interest rates.
5. Adoption of technology:
Technological advancements can make or break their business. Their ability to adopt new
technologies can make them more competitive, cost effective and access to market can be
easier. But day to day urgencies of these businesses hinder their long term perspective. Lack
of adoption will make them obsolete and existence will be under threat.
Now, the MSMEs businesses can leverage the technical support offered by the Government
agencies and modernise their operations to flourish and grow into larger businesses in no
time. Credit Linked Capital Subsidy for Technology Upgradation program has opened vistas
for technological improvisation by offering Knowledge partners in a number of fields
including Agriculture, khadi and many more at 15% capital subsidy.
6. Quality Human Resource:
One of the perennial issues faced by the MSMEs is their inability to attract and devote quality
Human Resource on growth agenda. Most of these MSMEs are often in the stage of frequent
firefighting and shortage of manpower given that they so thinly staffed. This makes it very
difficult for them to allocate these resources to work on long and midterm projects.

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Most of the workforce employed is either undereducated or undertrained making the lower
skillsets problem more pronounced in the MSME sector. Hence, Small Industries
Development Bank of India has studied and identified a number of skill gaps and also delved
on the sector specific urgency requirement for the upgrading of the worker skill sets
depending on the complexity of the manufacturing process and the already available
manpower skills.

7. Lack of Experience of Using External Experts:

A good consultant or a vendor often saves time and effort. They help by way of bringing
expertise and talent. However, most MSMEs largely depend on the capabilities of the
founders or the core team. The common build or buy dilemma makes them feel it is better to
do things in-house with their own staff. Many a times, in-house team may not have the
required experience and knowledge the time, effort and costs escalate.
8. Over Reliance on Existing Clients:
Some of these companies once having acquired some large or key clients let the business run
on autopilot. This can limit their business and ability to maximize their potential. This also
results into high concentration risk as over reliance can prove disastrous if the existing clients
were to move away. These businesses should always look at adding clients across sizes,
geographies, industry wherever possible.
Whatever reasons, they should continuously build brand value and focus on adding new
client along with the focus on retaining the existing ones. Fund constraints hamper the use of
marketing channels to create a strong sales funnel.

❖ Opportunities of MSMES in current scenario

1. Employment opportunities:
With the increase in MSME contribution to the GDP, there is a potential to increase its
contribution to employment to over 50 per cent over the next decade. Typically, MSME
sector can provide comparatively larger employment opportunities at comparatively lower
capital cost especially in the rural and remote areas, by becoming part of the industrial
ecosystem and act as ancillary units for large enterprises to support the system in growth.
India needs to create 10 to 15 million job opportunities per year over the next decade to
provide gainful employment to its population. Current MSME employment is at 28 per cent
of the overall employment.

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 2. Value added products:
The average technology value-addition in manufactured products exported by the Indian
industry is around 8 per cent, significantly low when compared to that of other emerging
developing nations. There is a clear opportunity white space in terms of global demand for
value added products and services. One example of positive movement to address this gap is
the setting up of the Technology Upgradation Fund for the plastic processing sector.

3. Building Brand India:

With efforts in the direction of promoting and creating international awareness of the ‘Make
in India’ label in markets overseas well underway, demand for goods and services is likely to
increase over the next decade. Schemes to market Indian products / brands in international
trade fairs are in place for the MSME to avail. Participation in global markets will not only
help MSME grow their business, but also become globally competitive enterprises.
4. E-Commerce:
Availability of online trade platforms is also emerging as a key enabler for MSME exports.
Traditional handicraft clusters and independent artisans, entrepreneurs are today connected to
the world and operate in the global market via e-commerce platforms. The penetration of e-
commerce in trade to the urban, rural MSMEs is increasing and is expected to boost exports
further.
5. Indigenisation and import substitution:
India is heavily dependent on imports for a large number of goods and services. While import
of certain goods like crude is inevitable, many other products across consumer sectors like
electronic white goods, lighting, and consumables which are not technology intensive, have a
significant potential to be substituted by local enterprises. Further, there is potential to
incentivise investments in high technology areas in order to develop capabilities in high
engineering import substitution and indigenisation in many areas of healthcare, automotive,
defence, electronics and telecom.
6. Taking the preferred standpoint of Government plans:
SMEs need to get advantages of Government activities, for example, ‘Make in India’,
‘Startup India’ and ‘Skill India’. These plans presented by the government are expected to
elevate an enterprising society to develop the current SME status.
7. Abundance of Fintech firms:
With the number of Fintech firms and lenders on the rise, SMEs will have the opportunity to
get accessible and affordable financing options.
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SMEs always had to worry about the gap in their cash flows while taking the SME loan from
the traditional lender. But now, they will be able to focus on their business entirely, as
enhanced speed, transparency, and quick SME loan facilities are about to increase
significantly.
SME loans have always helped the enterprises to meet all their business needs that arise from
time to time without facing any difficulty.

❖ Problems of SSI/ MSME

1. Poor capacity utilization:
In many of the Small Scale Industries, the capacity utilization is not even 50% of the installed
capacity. Nearly half of the machinery remains idle. Capital is unnecessarily locked up and
idle machinery also occupies space and needs to be serviced resulting in increased costs.
2. Incompetent management:
Many Small Scale Industries are run in an incompetent manner by poorly qualified
entrepreneurs without much skill or experience. Very little thought has gone into matters such
as demand, production level and techniques, financial availability, plant location, future
prospects etc. According to one official study, the major reason for SSI sickness is deficiency
in project Management i.e., inexperience of promoters in the basic processes of production,
cash flow etc.
3. Inadequate Finance:
Many Small Scale Industries face the problem of scarcity of funds. They are not able to
access the domestic capital market to raise resources. They are also not able to tap foreign
markets by issuing ADR’s (American Depository Receipts) GDR’s (Global Depository
Receipts) etc because of their small capital base. Banks and financial institutions require
various procedures and formalities to be completed. Even after a long delay, the funds
allocated are inadequate.
4. Raw material shortages:
Raw materials are not available at the required quantity and quality. Since demand for raw
materials is more than the supply, the prices of raw materials are quite high which pushes up
the cost. Scarcity of raw materials results in idle capacity, low production, inability to meet
demand and loss of customers.
5. Lack of marketing support:

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Small Scale Industries lack market knowledge with regard to competitors, consumer
preferences, market trends. Since their production volume is small and cannot meet demand
for large quantities their market is very restricted. Now with the process of liberalization and
globalization they are facing competition from local industries as well as foreign competitors
who sell better quality products at lower prices. For e.g. heavily subsidized but better quality
imports from China has made most of the Indian SSI units producing toys, electronic goods,
machine tools, chemicals, locks and paper etc., unviable.

6. Problem of working capital:

Many Small Scale Industries face the problem of inadequate working capital. Due to lack of
market knowledge their production exceeds demand, and capital gets locked in unsold stock.
They do not have enough funds to meet operational expenses and run the business.
7. Problems in Export:
They lack knowledge about the export procedures, demand patterns, product preferences,
international currency rates and foreign buyer behaviour. Small Scale Industries are not able
to penetrate foreign markets because of their poor quality and lack of cost competitiveness. In
countries like Taiwan, Japan etc. products produced by Small Scale Industries are exported to
many foreign countries. But in India not much thought and focus has gone into improving the
export competitiveness of Small Scale Industries.
8. Poor industrial relations:
Many Small Scale Industries are not able to match the pay and benefits offered by large
enterprises, because their revenues and profitability are low and uncertain. This leads to
labour problems. Employees fight for higher wages and benefits, which the SSI is not able to
provide. This may lead to strikes, resulting in damage to property in case of violence by
employees, production losses etc.

❖ Prospects of SSI/ MSMEs

1. Employment generation: There are large opportunities in the field of manufacturing and
service rendering of MSME’s. In the field of retail and manufacturing sector, MSMEs are
generating different and ample amount of employment.
2. Focus on customer satisfaction: Primarily, MSMEs manufacturing goods focus on taste
and preferences, liking and disliking of the consumer. But now a day they produce goods

19
according to the needs or expectations of the customers. So the MSMEs can be more
customer satisfaction oriented.

3. Minimization of regional imbalance: The MSMEs will utilize the manpower of rural
areas so such areas of the nation can equally developed through the running of MSME units
in rural areas. So this is helpful to minimize or remove the regional imbalance.

4. Development of Export: In the international market, there will be a large demand of

Indian products like wooden items, other handmade articles etc. So MSMEs have the
potential to improve the export of India.

5. Attraction of Foreign Investment: The Indian MSMEs are the growing sectors and their
growth rate and return on investment is satisfactory. This sector can attract foreign
investment in India, so their growth rate increasing drastically.

Hon’ble Prime Minister made 12 key announcements in the support and outreach programme
for MSMEs on 2nd November, 2018 for strengthening MSME sector. These 12 key
announcements are aimed to address various challenges faced by MSMEs such as access to
credit, market access, technology upgradation, ease of doing business, social security for
employees of MSMEs etc. The 12 key announcements are:

i. Launch of 59 minute loan portal to enable easy access to credit for MSMEs. In-principle
approval of loans upto Rs. 1 crore through the portal linked with GST portal.

ii. 2% interest subvention for all GST registered MSMEs, on fresh or

incremental loans, and an increase in interest rebate from 3% to 5% for
exporters who receive loans in the pre-shipment and post-shipment period.

iii. Companies with turnover more than Rs. 500 crore to be compulsorily
brought on the Trade Receivables e-Discounting System (TReDS) to enable
entrepreneurs to access credit, based on upcoming receivables.

iv. Central Public Sector Undertaking (CPSUs) units to make mandatory

procurement of 25% instead of 20% from MSEs.

v. CPSUs to make mandatory procurement of 3% from Women Entrepreneurs

out of 25% mandatory procurement.

vi. CPSUs to compulsorily be part of Public Procurement Portal Government e-

Marketplace (GeM). CPSUs to get their vendors registered on GeM portal.

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vii. 20 Hubs and 100 Spokes in the form of Tool Rooms for Technological
Upgradation to be established across the country with a fund allotment of
Rs. 6000 crore.

viii. Clusters for Pharma MSMEs to be formed with a support of 70% financial assistance
from Govt. of India.

ix. Only one annual return to be filed for 8 Labour laws and 10 Union regulations to
simplify Government procedures.

x. Computerized random allotment for visits to firms by Inspectors to simplify

Government procedures.

xi. Environment Clearance and Consent to establish unit, under air pollution
and water pollution laws, to be merged into a single consent. Return to be
accepted on the basis of Self-Certification.

xii. Ordinance has been promulgated to enable entrepreneurs to correct the

minor violations under the Companies Act through simple procedures rather
than to approach Courts.

❖ Performance of MSME/ SSI Sector

✓ Contribution of MSMEs in Indian Economy
MSMEs have been contributing significantly to the expansion of entrepreneurial base
through business innovations. MSMEs are widening their domain across sectors of the
economy, producing diverse range of products and services to meet demands of domestic
as well as global markets. There are over 6000 products ranging from traditional to high-
tech items, which are being manufactured by the MSMEs in India.

As per the latest data available with Central Statistics Office (CSO), Ministry of Statistics &
Programme Implementation (MoSPI), the contribution of MSME Sector in the country’s
GVA and GDP, at current prices are;

Contribution of MSMEs in Country’s Economy at Current Price

(in ₹ crore)
Year MSME Growth Total GVA Share of Total GDP Share of

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 GVA (%) MSME in MSME in
GVA (%) GDP (%)
2012-13 2977623 15.27 9202692 32.36 9944013 29.94
2013-14 3343009 12.27 10363153 32.26 11233522 29.76
2014-15 3658196 9.43 11481794 31.86 12445128 29.39
2015-16 3936788 7.62 12458642 31.60 13682035 28.77
Source: Annual Report Ministry of MSME 2017-18

✓ Comparison of MSME export to total exports

The MSME sector in India is contributing more than 40% to exports. It can be seen from
the below that the share of MSME exports has increased from 43% in 2012-13 to 49% in
2017-18.
Share of MSME exports in total exports
(Amount in USD Million)
Year Total Exports Exports by MSME Share of MSME
Exports *(%)
2012-13 300400 127992 43
2013-14 314415 133313 42
2014-15 310352 138896 45
2015-16 262291 130768 50
2016-17 275852 137068 50
2017-18 303376 147390 49
*Decimal points rounded off
Source: RBI & Press Information Bureau/Directorate General of Commercial Intelligence
and Statistics. (DGCIS)

Further, the trend in growth of MSME exports is in line with the total exports of the country.
As can be seen from chart MSME exports grew by 4.19% in 2014-15, which declined to -
5.85 % in 2015-16. During the same period total exports also declined from -1.29% to -
15.49%. During 2016-17 and 2017-18 there was positive growth in case of both MSME
exports and total exports.

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 ✓ Estimated number of MSMEs in country:
The MSMEs in India are playing a crucial role by providing large employment opportunities
at comparatively lower capital cost than large industries as well as through industrialization
of rural & backward areas, inter alia, reducing regional imbalances, assuring more equitable
distribution of national income and wealth. As per the National Sample Survey (NSS) 73rd
round, conducted by National Sample Survey Office, Ministry of Statistics & Programme
Implementation during the period 2015-16, there were 633.88 lakh unincorporated non-
agriculture MSMEs in the country engaged in different economic activities (196.65 lakh in
Manufacturing, 0.03 lakh in Non-captive Electricity Generation and Transmission , 230.35
lakh in Trade and 206.85 lakh in Other Services) excluding those MSMEs registered under
(a)Sections 2m(i) and 2m(ii) of the Factories Act, 1948, (b)Companies Act, 1956 and (c)
construction activities falling under Section F of National Industrial Classification (NIC)
2008.
Estimated Number of MSMEs (Activity Wise)

Activity Estimated Number of Enterprises (in lakh) Share (%)

Category
Rural Urban Total

(1) (2) (3) (4) (5)

Manufacturing 114.14 82.50 196.65 31

Electricity* 0.03 0.01 0.03 -

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Trade 108.71 121.64 230.35 36

Other Services 102.00 104.85 206.85 33

All 324.88 309.00 633.88 100

*Non-captive electricity generation and transmission
(Source: Annual Report of Ministry of MSME 2019-20)

Distribution of Estimated MSMEs (Nature of Activity Wise)

*Non-captive electricity generation and transmission

(Source: Annual Report of Ministry of MSME 2019-20)

✓ Employment
As per the National Sample Survey (NSS) 73rd round conducted during the period 2015-16,
MSME sector has been creating 11.10 crore jobs (360.41 lakh in Manufacturing, 0.07 lakh in
Non-captive Electricity Generation and Transmission, 387.18 lakh in Trade and 362.22 lakh
in Other Services) in the rural and the urban areas across the country.
Estimated Employment in the MSME Sector (Activity Wise)

Broad Activity Employment (in lakh) Share (%)

Category Rural Urban Total

(1) (2) (3) (4) (5)

Manufacturing 186.56 173.86 360.41 32

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Electricity* 0.06 0.02 0.07 -

Trade 160.64 226.54 387.18 35

Other Services 150.53 211.69 362.22 33

All 497.78 612.10 1109.89 100

*Non-captive electricity generation and transmission
(Source: Annual Report of Ministry of MSME 2019-20)

Distribution of employment in the MSME sector category wise

*Non-captive electricity generation and transmission

(Source: Annual Report of Ministry of MSME 2019-20)

• Micro sector with 630.52 lakh estimated enterprises provided employment to 1076.19
lakh persons that in turn accounts for around 97% of total employment in the sector.
Small sector with 3.31 lakh and Medium sector with 0.05 lakh estimated MSMEs
provided employment to 31.95 lakh (2.88%) and 1.75 lakh (0.16%)persons of total
employment in MSME sector, respectively.

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 Distribution of employment by type of Enterprises in Rural and Urban Areas
(Numbers in lakh)

Sector Micro Small Medium Total Share (%)

Rural 489.30 7.88 0.60 497.78 45
Urban 586.88 24.06 1.16 612.10 55
All 1076.19 31.95 1.75 1109.89 100

(Source: Annual Report of Ministry of MSME 2019-20)

Percentage Share of Rural and Urban MSMEs in the Country

(Source: Annual Report of Ministry of MSME 2019-20)

❖ Pattern of Growth of MSMEs

India is currently one of the fastest growing economies of the world. MSME sector is likely
to continue to play a significant role in the growth of the Indian economy. In the last ten
years, MSME sector has shown impressive growth in terms of parameters like number of
units, production, employment, and exports. Given the right set of support systems and

26
enabling framework, this sector can contribute much more, enabling it to actualize its
immense potential.

✓ Growth rate of MSME Sector in comparison with the Overall Industrial Sector
MSMEs provide employment opportunities at comparatively lower capital cost and act as
ancillary units for large enterprises to support the system in growth. The MSME sector has in
many years registered a higher growth rate than the overall growth of industrial sector.

During 2000 to 2006, India witnessed industrial growth in the range of 5-8% annually.
Subsequently, it recorded double digit growth for 4-5 years, before slowing down to around
6% growth during 2015-2016. The MSME sector improved its growth performance during
2003 – 2009 and recorded a growth of over 10% during 2008-09. Introduction of MSMED
Act, 2006 apparently played a role here. However, post 2008 global financial crisis, MSME
growth fell sharply and hovered around 4-7%.

✓ Micro sector with 630.52 lakh estimated enterprises accounts for more than 99% of
total estimated number of MSMEs. Small sector with 3.31 lakh and Medium sector
with 0.05 lakh estimated MSMEs accounted for 0.52% and 0.01% of total estimated
MSMEs, respectively. Out of 633.88 estimated number of MSMEs, 324.88 lakh
MSMEs (51.25%) are in rural area and 309 lakh MSMEs (48.75%) are in the urban
areas.

27
 Distribution of Enterprises Category Wise
(Numbers in lakh)

Sector Micro Small Medium Total Share (%)

(1) (2) (3) (4) (5) (6)
Rural 324.09 0.78 0.01 324.88 51
Urban 306.43 2.53 0.04 309.00 49
All 630.52 3.31 0.05 633.88 100

(Source: Annual Report of Ministry of MSME 2019-20)

Percentage share of rural and urban MSMEs in the country

(Source: Annual Report of Ministry of MSME 2019-20)

✓ Type of Ownership of Enterprises

Male/ Female Ownership
Out of 633.88 MSMEs, there were 608.41 lakh (95.98%) MSMEs were proprietary
concerns. There was dominance of male in ownership of proprietary MSMEs. Thus,
for proprietary MSMEs as a whole, male owned 79.63% of enterprises as compared to
20.37% owned by female. There was no significant deviation in this pattern in urban

28
 and rural areas, although the dominance of male owned enterprises was slightly more
pronounced in urban areas compared to rural areas (81.58% as compared to 77.76%).

Percentage Distribution of Enterprises in rural and urban areas.

((Male/ Female ownership) category wise)

Sector Male Female All

Rural 77.76 22.24 100
Urban 81.58 18.42 100
All 79.63 20.37 100

(Source: Annual Report of Ministry of MSME 2019-20)

Percentage distribution of enterprises owned by Male/ Female

entrepreneurs wise

Category Male Female All

Micro 79.56 20.44 100
Small 94.74 5.26 100
Medium 97.33 2.67 100
All 79.63 20.37 100

(Source: Annual Report of Ministry of MSME 2019-20)

✓ Ownership of Enterprises Social Category Wise

The socially backward groups owned almost 66.27% of MSMEs. Bulk of that was
owned by OBCs (49.72%). The representation of SC and ST owners in MSME sector was
low at 12.45% and 4.10% respectively. In rural areas, almost 73.67% of MSMEs were owned
by socially backward groups, of which 51.59% belonged to the OBCs. In urban areas, almost
58.68% belonged to the socially backward groups, of which 47.80% belonged to the OBCs.
The analysis of enterprises owned by socially backward groups in each of the three
segments of MSME sector reveals that micro sector had 66.42% of enterprises owned by
socially backward group, whereas small and medium sectors had 36.80% and 24.94% of
enterprises owned by socially backward groups, respectively.

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 ✓ State-wise Distribution of estimated MSMEs
State of Uttar Pradesh had the largest number of estimated MSMEs with a share of 14.20% of
MSMEs in the country. Top 10 States accounted for a share of 74.05% of the total estimated
number of MSMEs in the country.

State-wise Distribution of enterprises

Sl. No. State/UT Estimate Number of MSMEs

Number (in lakh) Share (in %)
1 Uttar Pradesh 89.99 14
2 West Bengal 88.67 14
3 Tamil Nadu 49.48 8
4 Maharashtra 47.78 8
5 Karnataka 38.34 6
6 Bihar 34.46 5
7 Andhra Pradesh 33.87 5
8 Gujarat 33.16 5
9 Rajasthan 26.87 4
10 Madhya Pradesh 26.74 4
11 Total of above ten States 469.36 74
12 Other State/UTs 164.52 26
13 All 633.88 100

(Source: Annual Report of Ministry of MSME 2019-20)

Since September, 2015, in view of promoting ease of business, an online filing system under
Udyog Aadhar Memorandum (UAM) based on self-declared information has been put in
place. Till end of 15.01.2020, 84.82 lakh MSMEs have already registered on UAM.

An analysis of UAM filings also provides a break-up of manufacturing and services MSMEs.
It may be noted that the MSMEs in service sector comprise a larger proportion of UAM
filings than those involved in manufacturing.

30
 Share of UAM filings - Manufacturing and Services

(Source: Annual Report of Ministry of MSME 2019-20)

As can be seen, Micro enterprises constitute the vast majority of the enterprises (89%) who
have filed UAMs since 2015, while the remaining are mostly Small Enterprises (11%) with
Medium enterprises constituting less than 0.5% of the total UAMs filed.

Distribution of Micro, Small and Medium Enterprises as per UAM filings

(Source: Annual Report of Ministry of MSME 2019-20)

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