Context:
The government is evaluating a proposal to establish a separate bank dedicated to direct lending for micro, small, and medium enterprises (MSMEs). This initiative aims to enhance credit availability in this under-served sector, thereby stimulating economic activity and job creation.
Relevance:
GS III: Indian Economy
Dimensions of the Article:
- New Bank to Bridge Credit Gap for MSMEs
- MSMEs in India
- Significance of MSMEs and Problems Faced
New Bank to Bridge Credit Gap for MSMEs
Government Plans
- The government is setting up a separate bank to directly lend to micro, small, and medium enterprises (MSMEs).
- The ownership structure, potentially a public-private partnership model, is under consideration.
Current Scheme
- Small Industries Development Bank of India (SIDBI):
- Established in 1990, SIDBI primarily refinances banks lending to MSMEs to lower financing costs.
- Major shareholders include:
- Government of India (20.85%)
- State Bank of India (15.65%)
- Life Insurance Corporation of India (13.33%)
- National Bank for Agriculture and Rural Development (9.36%)
- SIDBI obtains low-cost funds from banks that fall short of priority sector lending (PSL) targets.
- Growth depends on scheduled commercial banks meeting their PSL targets.
- Additional Lending Entities:
- State financial corporations
- State industrial development corporations
Need for a New Bank
- Current Credit Penetration:
- MSME credit penetration is 14% in India compared to 50% in the US and 37% in China.
- Credit Gap:
- There is a Rs 25 trillion credit gap in the Indian MSME sector.
- Outstanding credit to MSMEs expanded by 20.9% to Rs 26 trillion by December 2023.
- Challenges:
- Inadequate, untimely, and costly finance hinders MSMEs’ growth.
- Large banks often fail to understand MSMEs’ specific needs.
MSMEs in India
Economic Importance
- MSMEs are crucial to employment generation, exports, and overall economic growth.
- They account for over 11 crore jobs and contribute around 27% of India’s GDP.
- The sector includes around 6.4 crore MSMEs, with 1.5 crore registered on the Udyam portal.
- MSMEs employ 23% of the Indian labor force, making them the second-largest employer after agriculture.
- They contribute 38.4% of the total manufacturing output and 45.03% of the country’s total exports.
Significance of MSMEs and Problems Faced
Importance
- Labor-intensive sector promoting inclusive growth, financial inclusion, and innovation.
- Backbone of the Indian economy with over 110 million jobs (23% of the labor force).
- Contribute 27% to India’s GDP, 38.4% to manufacturing output, and 45% to total exports.
Challenges
- Dwarfs vs. Infant Firms:
- Dwarf firms consume vital resources but contribute less to job creation and economic growth.
- Funding Sources:
- 90% of MSME funding comes from informal sources.
- Technology Integration:
- Adoption of big data, AI, and virtual reality (Industry 4.0) in manufacturing is still in its infancy.
- Cleantech Innovation:
- The sector lacks cleantech innovation and entrepreneurship, which can promote energy efficiency and transition to a circular and low-carbon economy.
-Source: The Hindu
