Top 5 factors boosting MSME sector in India; banks and NBFCs to benefit the most


India has 388 small and medium enterprises (SME) clusters across 180 districts contributing to 40 percent of the country’s industrial output and 35 percent of the direct exports.

In terms of employment, Micro, Small & Medium Enterprises (MSME) is second to only agriculture and has provided employment to 14 million people.

In the last 7 years, the number of MSME enterprises has grown at 4.4 percent. During the same time, loan penetration has increased 2-3 times.

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While the total demand for credit is ~ Rs 40 lakh crore, the current supply through formal channels is 60 percent, indicating that informal channels like moneylenders, etc. are still existent.

This is an opportunity for formal channels like banks and NBFCs to capture in the next few years.

There are 5 major trends that have helped the MSME segment in the past few years

Robust growth of 6.8 percent in the Indian GDP over the last 10 years

Strong thrust to improving manufacturing through the “Make in India” campaign with some key initiatives like
a. Opening up of key sectors including Railways, defence, insurance and medical devices to higher levels of Foreign direct investment
b. Development of industrial corridors across various regions of the country

Slew of reforms, both at the central and the state governments, to facilitate setting up of businesses

Improved availability of formal credit for the small and micro enterprises segment

In the last few years, the digital retail channel has blossomed, this has also led to heavy investments in ramping up the supply chain to support this infrastructure. There has also been immense growth in the Engineering & Automotive industry, food processing industries thereby fueling a growth in supply chain dominated SME industries.
While these trends have helped the MSME business to flourish, there needs to be concerted effort in 4 important aspects to carry forward this thrust:

Providing adequately trained and skilled manpower: With more and more sophisticated machinery usage, the industry needs have shifted to highly skilled operators and there needs to be a seamless supply in the near future. Skill programmes through the National skill development agency & National council on vocational training could potentially help bridge this skill gap.

Massive need for providing adequate infrastructure including roads, power, etc for these industries

Continued supply of credit: Currently despite the best efforts 40 percent still rely on the informal sources for funds. There needs to be a concerted effort to provide funds for these sources.