An Insight Into The Challenges And Growth Opportunities For Smes In India

India is a nation of small businesses. From small neighbourhood Kirana stores to cottage industries and other local businesses – small enterprises play a crucial role in the Indian economy. According to reports by the Ministry of Micro, Small and Medium Enterprises, small businesses contribute to 30% of the overall GDP of the nation and employ more than 100 million people.

Despite their vital importance in the economy, small businesses have a hard time raising the required capital. Here, in this guide, we offer you all that you need to know about the scope of growth of small businesses in India and how to find the required financing.

What are SMEs?

Small and medium enterprises are classified in India based on their investment levels. According to the MSMED (Micro, Small and Medium Enterprises Development) Act of 2006, SMEs are classified as follows:

Here, investment refers to investment in equipment, machinery, and the plant but does not include the costs of building or the land. 

Role of SMEs in the Indian Economy: At a Glance

It’s no exaggeration that SMEs form the backbone of the Indian economy. SMEs played a crucial role in helping India weather the global slowdown in the late 2000s. 

SMEs are one of the key drivers of the Indian growth story. The SME sector comprises industries and businesses across various verticals like – manufacturing, infrastructure, food processing, chemicals, packaging, service industry, IT and more. SMEs can be proprietary firms, partnerships, private limited companies, private self-help groups, village industries, cottage industries and more. 

Here, are a few numbers that illustrate the significance of SMEs:

• Number of SMEs in India – 42.5 million units (which includes both registered and unregistered units). 

• SMEs account for 95% of the total industrial units in the country and produce more than 6000 products.

• SMEs contribute to the industrialisation of rural and backward economic areas.

• SMEs employ about 106 million people that are nearly 40% of the total workforce. SMEs are the biggest employers in the country next to the agricultural sector. 

• SMEs contribute to 30% of the nation’s GDP – 24.63% from the service sector and 6.11% from the manufacturing sector. 

• SMEs contribute to 45% of the total manufacturing output of the country and 40% of the overall exports.

• SMEs have maintained an average growth rate of 10% over the last few years. 

Various Challenges Faced by SMEs in India

Despite the large volumes, the SME sector in India has not seen significant growth. There are several reasons behind the reluctance to grow – one, SME owners do not want to expand their market due to taxation and other regulatory hurdles. 

The second biggest reason for lack of growth in SMEs is the unavailability of required finances and support to grow. A market survey conducted among 15,000 listed and unlisted businesses from the IT & ITES, power, textile and agriculture sector showed that increasing interest rates was a major hurdle for SMEs to grow. 

Besides interest rates, short repayment timelines was another huge reason. While big corporations can avail interest-free loans with a repayment timeline of 120 days, for SMEs, the repayment timeline is limited to 60 days. As a result, SMEs are crippled due to the lack of the required funding to grow.

Other factors include global slowdown, especially due to unrest in West Asian countries, drop-in national consumer demand in sectors like real estate and automobiles. Supply-chain inefficiencies, insufficient skilled manpower, global and local competition, reducing profit margins are some of the reasons why SMEs have not been able to land the spotlight. 

Funding Opportunities Available to SMEs in India

Understanding the various challenges faced by SMEs, banks, NBFCs and the government of India offer several financing opportunities. Some of the funding options include:

• Bank Loans – While banks offer business loans – term loans and working capital loans – to SMEs, not many SMEs meet the strict eligibility criteria of banks. 

• Foreign Bank Loans – Not just Indian banks, but foreign banks also offer business loans to SMEs. This is a huge benefit as it increases the competition among local banks and foreign banks, which reduces interest rates of loans. 

• Venture Capital – This funding is a huge success for start-ups as it offers direct access to large capital in a short period of time. 

• NBFC Loans – Apart from banks, NBFCs (Non-Banking Financial Corporations) offer various financing to SMEs. 

• Digital Lenders – There has been a significant rise in digital lending platforms that offer peer-to-peer collateral-free loans to meet the financing requirements of SMEs. 

Popular Types of SME Loans 

SMEs can choose from a wide range of business loans based on their requirements. This includes:

• Term Loans – SMEs can avail a specified loan amount, which they have to repay as fixed EMIs over a pre-decided tenure. Term loans can either be:

  • Secured Business Loans – Where the borrower has to submit a collateral

  • Unsecured Business Loans – These loans do not require any security 

• Project Finance – This is a special loan product, where SMEs can avail funding for a new project. 

• Equipment Finance – SMEs can avail loans to purchase new equipment or upgrade existing machinery. 

• Working Capital Loans – Avail funding to meet the day-to-day operations of your business. Ideal for boosting cash flow and for seasonal businesses. 

• Cash Credit Facilities – Several lenders offer cash credit facilities to SMEs based on their current assets. SMEs can avail cash credits by pledging unpaid invoices, inventory, stock in trade, account receivables, etc. Cash credit is extended usually as overdrafts, which the borrower pays over a period. 

• Invoice Discounting – SMEs can raise working capital quickly by converting existing assets into liquid assets. Business owners can avail funds by discounting bills/unpaid invoices before their due date. 

The Role of the Government in the Growth of SMEs

The Government of India has launched several initiatives to offer a lending hand to SMEs. Some of the major government schemes for SMEs in India include:

• Credit Guarantee Fund Scheme – This scheme is available to both existing and new enterprises. Under this scheme, the SIDBI offers working capital loans of up to Rs. 1 crore, to eligible SMEs. 

• Credit Linked Capital Subsidy Scheme for Technology Upgradation (CLCSS) – This scheme has been created by the MSSI (Ministry of Small Scale Industries). It offers a capital subsidy of 15% up to a maximum of Rs. 15 lakhs for machinery and plant modernisation. 

• Pradhan Mantri MUDRA Yojana (PMMY) – The PMY offers credit to SMEs from the non-agricultural sector. Business owners can avail credits under three different schemes – Sishu, Kishore and Tarun. All loans under PMMY are unsecured and collateral-free. The loans can be used to launch a new enterprise or to meet the cash flow needs of existing businesses. 

• Financial Assistance for International Trade Fairs, Exhibitions – The government of India offers financial assistance to SMEs for participating in various industry events. Under this scheme, SMEs can avail reimbursement of up to 75% on the one-time registration fee and annual fees. 

Besides these schemes, the government also offers various credit facilities for technology upgradation of SMEs, training, tool investment and more. All these schemes help SMEs make the most of market opportunities and expand their business. 

The Role of Technology in the Growth of SMEs

For years, the SME sector in India could not compete with global and national corporations due to a lack of technology. However, with the digital revolution, SMEs in the country are making use of the latest technologies like:

• Mobile payments

• FinTech

• Cloud Computing

• Big Data

• AI and machine learning tools

These technologies help SMEs improve their product quality as well as offer customers a seamless experience, which, in turn makes them competitive in the global and national markets. 

EndNote – SMEs are Poised to Grow

While it’s true that SMEs have plenty of hurdles to overcome, they also have ample growth opportunities. There are several loan products – both traditional and technology-driven – to help small business owners make the most of market opportunities. 

Make sure to evaluate the different loan products available – the size of loan, tenure, interest rates, and other terms and conditions to pick the right one that works for you. If you need any help choosing the right funding product for your business, make sure to get in touch with the team at CreditMantri to help you out.

Additional Reading: How Small and Medium Enterprises (SMEs) Can Get Access to Funds?