The Key Reasons Behind MSME Credit Gap

According to current estimates, India has about 75 million MSME, which contribute close to one-third of the country’s GDP. The absence of dependable and efficient finance facilities is one of the main problems for businesses. 

What is the credit gap and how does it affect the MSME sector?

Simply put, a credit gap is a difference between the demand for credit and the actual credit availability. The availability of formal financing is taken into consideration when calculating the credit gap for MSMEs. These small businesses can access unofficial sources of funding, but they are sometimes offered at exorbitant interest rates.

Only 10% of all MSMEs operating in India have access to formal finance sources. MSMEs are thus unable to function financially in the absence of formal loans. Smaller businesses are frequently unable to survive due to the credit gap, which results in closure and job losses.

While financial institutions are prepared to provide an MSME loan to qualified candidates, a few issues restrict these businesses from approaching lenders in search of funding.

Why does the credit gap exist?

There are a number of unimportant causes behind the current credit gap. However, four issues are mostly to blame for MSMEs’ inability to obtain the required funds from official credit sources. These include

Improper record maintenance

Many MSMEs in India don’t keep their business practices transparent. They might not have crucial financial records, such as the P&L, transaction history, or even tax return filings. These are some of the most important requirements for obtaining an MSME loan.

Lenders are unable to assess a company’s financial status without any knowledge of these factors, which results in the denial of credit applications. Additionally, they are unable to evaluate the borrower’s creditworthiness, which greatly increases the risk of their loan.

Lack of assets to leverage

NBFCs can sanction funding even if a company lacks the paperwork needed for MSME loan scheme based on the value of assets that may be fictitious. Unfortunately, the majority of MSMEs in India lack valuable assets, which prevents them from obtaining secured loans as well.

Only about 16% of the country’s MSMEs’ demand for debt in the amount of Rs. 69 lakh crore was met by formal financing options like an MSME loan.

Such businesses have no ability to mitigate the high risk to lenders in the case of credit disbursement because they lack a collateral asset.

Complicated document process

Today’s business executives generally adhere to a complex paperwork process, which can cause MSMEs additional issues. The lengthy list of paperwork that businesses must produce when applying for loans can be stressful.

Additionally, not all businesses are capable of organizing these records, which results in a complete discrepancy between what is needed and what micro, small, and medium-sized businesses (MSME in full) are able to offer. Knowledge of the documentation process for these credits is essential before you can use them to handle your firm finances.

For their business loans, some lenders maintain a straightforward paperwork process. This makes applications simple anytime funding is required.

Additionally, the NBFC offers pre-approved offers, expediting and streamlining the application process even more. These deals are accessible on a variety of financial goods, such as personal loans, business loans, etc. By entering your name and phone number, you may check your pre-approved offers.

Delayed disbursements

An application for an MSME loan may take financial institutions several weeks to process. It will take a while for these smaller businesses to support themselves without outside funding. These organizations could require quick access to money to cover urgent costs like paying employee salaries and other obligations.

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