Government Considers New Bank for MSME Lending

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:

1. New Bank to Bridge Credit Gap for MSMEs
2. MSMEs in India
3. 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