If all ecosystem participants including banks, NBFCs, and fintechs align on the opportunity that PSL presents and work collaboratively with the support of innovations like embedded finance, cash flow-based financing, regulatory guardrails, and PPP (Public-Private Partnerships), India is poised to unlock the full potential of MSMEs.
MSMEs are the backbone of global economies and more so in fast-growing markets like India. They aid in generating a large number of employment opportunities, thus contributing significantly to economic growth and GDP. MSMEs feed larger enterprises and spawn more expansive and robust industrial output.
Today there are over 64 million MSMEs which collectively contribute over 30% of our country’s GDP and some 44% of exports while providing employment opportunities to over 164 million people accounting for 31% of the workforce. Yet, industry reports peg the MSME credit penetration in India at just 14% against the larger economies like the US and China, where the credit penetration is at 50% and 37%, respectively.
If India is to realize its ambitions to grow to a $5 trillion economy, it is more imperative than ever to ensure the growing credit needs for this already severely underserved segment are met. As per ‘India Digital SME Credit Report’, there is an existing credit gap of over $170 billion and the working capital requirement for MSMEs is expected to grow to over $570 billion by 2027.
This gap can be attributed to many reasons, including stringent collateral requirements, high interest rates, and the perceived risk associated with lending to smaller enterprises. Priority Sector Lending (PSL) seeks to help correct some of these problems.
All lending institutions such as Banks, Microfinance Institutions (MFIs), Development Financial Institutions (DFIs), Non-Banking Financial Companies (NBFCs), fintechs, and various government schemes play a crucial role in addressing the credit needs of smaller enterprises and priority sectors, thereby helping to bridge the credit gap. Some of the ways this is and can be supported include:
The central banks stipulate that financial institutions should lend a certain percentage of their portfolio to the priority sectors, including micro, small, and medium enterprises. For example, in India, the statutory requirement is that every bank should deploy at least 40% of its Adjusted Net Bank Credit to priority sectors as mandated by the Reserve Bank of India. This statutory requirement ensures MSMEs get at least a minimum quantity of credit and are not wholly squeezed out of credit markets by big and more established businesses.
