Indian MSME Sector is Plagued by Deficits in Climate Finance. Mentioning the Challenges in Accessing Climate Credit, Enumerate the Measures to Augment Climate Finance for Decarbonization of this Sector. (150 Words / 10 M) (GS-3 Industry)

Approach:

1. Introduction – contribution of MSME sector & brief intro.
2. Defining climate finance, point out the credit gap.
3. Mention the major impediments to access climate finance.
4. Way forward.

The MSME sector contributes around 30% to India’s GDP, and employs around 120 million people. But at the same time, it generates around 110 MT of CO₂ equivalent. This sector uses 13% (81 MT) of total coal/lignite, 7% (8.5 MT) of petroleum products and 8% (3.3 billion cu.m.) of the natural gas supplied in India in 2015-16.

The MSME sector needs a push to adopt new technologies that quickly minimize its C-footprints and make it less vulnerable to climate change risks. This can be achieved with the aid of climate finance – traditional funds cannot help the sector to become decarbonized.

Climate Finance: Climate finance is the money paid by developed countries to developing countries to help them take emission reduction-mitigation measures and adaptation.

the MSME sector faces a huge credit gap. According to a study by IFC in 2018, the credit gap was found to be around $37 billion (2010) and reached more than $330 billion in 2017. In 10 years, the gap compounded annually at 37% rate. The overall debt demand of this sector is more than $88 billion of which only 16% is catered by the formal financial institutions.

Climate finance will enable transfer of technology & expertise from developed to developing nations, which require resources to combat climate change at the rate that the world demands.

Challenges in Accessing Climate Finance:

• MSME lacks knowledge of how their business can profit from climate finance by lack of awareness & financial literacy.
• Only 16% MSMEs can access formal banking system imposing a major barrier.
• No comprehensive procedure to avail international climate funds. Many small & micro-businesses cannot implement these since they lack the means & ability.

Way forward:

• Financial needs require innovation like incentives & blended-based financing to achieve low-carbon pathways.
• Revamping digital finance
• Reducing complexities to access finance by connecting more institutionalized financial credit system.
• Accelerated aspects of decarbonization like cleaner fuel, common combustion facilities, and energy efficiency technologies.