India’s path to a USD 5 Tn. (~INR 410 Tn.) by 2026-27, can be paved with investments leading to increase in employment generation, firm productivity, and export growth. At present, MSME sector employ 110 Mn. people, contributing ~27% to the national Gross Domestic Product (GDP). Additionally, MSME exports stood at ~43% of the country’s total exports.
Policymakers have identified unmet financial gaps from institutional sources as a significant stressor to MSMEs' growth. Currently, the government has been working towards policy interventions to improve access to institutional sources of finance. Access to credit interventions can be categorized into three broad areas: novel financing channels, improving access to existing formal credit, and technological interventions. Majority of the existing policies in India fall under the second category. While the central government has introduced reforms to create novel financial channels and enable technological interventions, the efforts on the same from states have been very limited.
This white paper reviews existing policy interventions to increase access to finance for MSMEs, assesses gaps, and examines policy options from countries around the globe and Indian states. Based on this analysis, the paper makes a few key recommendations:
Formalize the adoption of Open Financial Networks for credit, payments, insurance, investments, and tax filing.
Promote the use of blended finance instruments for state level MSME ecosystem to ensure that public funds are supported by impact investment and private sector funds, thereby improving operational efficiency.
Promote the creation of cooperatives and microfinance lending institutions, which have better geographical reach and community buy-in than commercial banks
Establish technical training programmes to ensure that banks and NBFCs have sector specific knowledge to serve MSMEs.
Create a platform to enable voluntary enrollment by MSMEs that are not registered with the GST, EPFO, or ESIC, to allow MSMEs to take advantage of the Open Financial Networks.