MSME FINANCE
Brief overview of MSMEs in India

MSMEs complement large corporates as suppliers and directly cater to end users. The MSME sector contributes to the
India’s socioeconomic development by providing vast employment opportunities in rural and backward areas, reducing
regional imbalances, and assuring equitable distribution of national wealth and income. The segment currently contributes
to 28% of the GDP, over 40% of exports and creates employment for approximately 110 million people in India, thus
supporting economic development and growth.

The RBI has adopted the definition of MSMEs in line with the Micro, Small and Medium Enterprises Development Act,
2006 (“MSMED Act”). This definition is based on investments in plant and machinery in the manufacturing and services
sectors. However, the Government has proposed an amendment to the MSMED Act, to have a single definition for
manufacturing and services.

New definition of MSMEs

 

Investments in manufacturing and services

 

 

 

Micro Up to 2 10 million
Small = 10 million - = 100 million
Medium = 100 million - = 500 million

 

 

Turnover for manufacturing & services

 

 

 

Micro Up to 2 50 million
Small % 50 million - = 500 million
Medium 500 million - 2 2,500 million

 

 

 

 

Financial institutions also use internal business classifications to define MSMEs, based on their turnover. Majority of the
banks and non-banks follow this practice.

MSME credit growth declined sharply in Fiscal 2020

The nationwide lockdown in India has disrupted economic activity, impacted working capital needs, supply chain, future
investments and expansions. Domestic supplies and supplies from imports have also suffered. Contractual, wage labour
have been impacted and are expected to get impacted even further, leading to layoffs, unrest and lowering of purchasing
power and thus, hindering MSMEs’ businesses. With risk of COVID-19 pandemic remaining strong in many parts of
India, prolonged lockdown has already adversely impacted the loan growth substantially. Further, once the lockdown is
lifted, the businesses would take a while to return to normalcy. Therefore, growth recovery could be expected only in the
second half of Fiscal 2021. Therefore, it is estimated that the overall MSME growth will be approximately 3% to 4% in
Fiscal 2020 and approximately 2% to 3% in Fiscal 2021 as already slowing economy is further worsened by COVID-19
pandemic. However, with the Government’s increased focus towards manufacturing in India and easing of loan process
for MSMEs, the MSME segment is expected to experience faster growth rates in Fiscal 2022 and Fiscal 2023, leading to
a CAGR of approximately 5% to 6% through Fiscal 2023.

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