One of the greatest advances made under the Indian business and economic market is the development of the micro, small, and medium enterprises or MSMEs for short.
The importance of the MSMEs has been realized in the wake of their contribution towards the economic status of a country and the power these businesses hold over the employment rate of the nation.
MSMEs have the most influence on the economy of a nation which is why there have been a variety of initiatives taken by the government in recent times to expand the horizon for such business sectors.
In India, the MSMEs have been classified under two categories which include:
- Manufacturing enterprises: As the name suggests, these business sectors are engaged in the manufacturing and production part of a business/enterprise.
- Service enterprises: What comes next to manufacturing? Rendering the services to a business. This type of MSME is concerned with those sections that are involved in providing business-related or production-related services apart from manufacturing.
This classification forms a bigger picture of the MSME sector. The two categories are further classified based on the type of investment that they involve (plant or machinery) and also on the investment made on providing equipment for the services.
| Type of Enterprise | Type of investment | Type of turnover |
| Microenterprise | Such enterprise involves an investment of less than Rs.1 crore | Such an enterprise has a turnover of less than Rs.5 crore |
| Small enterprise | Such enterprise involves an investment of Rs.10 crore or lower | The turnover under such enterprise is generally Rs.50 crore or less |
| Medium enterprise | For an enterprise to be regarded as Medium, it should involve an investment of Rs.50 crore or less. | The turnover for a medium enterprise is generally less than Rs.250 crore. |
Recently the GOI has decided that the turnover rate of an enterprise shall not be considered as a determinant for its classification.
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The current state of the MSME sector in India:
It wouldn’t be a big stretch in saying that MSME has bombarded the Indian economy. So much so, it now contributes a hefty 30% to India’s GDP, and rightfully so because this sector has the most labourers and working taskforce compared to any other sector in the country.
Amongst the total number of enterprises that operate in the country, around 90% belong to the MSME sector. These enterprises beat out large-scale businesses in the intensity of labor and employment trends.
The vast development of MSME sectors has been possible due to the stringent efforts made by the government. These efforts have come in the form of special cabinet meetings like those in 2019 where the core classification and operation of MSME was pondered upon up until 2020 where the Union budget addressed new developments under the sector.
Perhaps the foundation of the MSME sector in India was laid by the MSMED (Micro, Small and Medium Enterprises Development) act of 2006. This act was important because it was the first time the small and medium scale industries incorporated legal structure for their operation. This act was helpful in putting the underappreciated and neglected industrial sectors at par with the large-scale industries. This kickstarted the growth of small-scale businesses in the country.
Since the past five decades, the MSMEs have been one of the highest growing sectors based on economic contribution in India. During the initial phase of the XI plan, this sector displayed an excellent growth rate of 13% which has only increased with time. The XII plan was aimed to strengthen the financial core of the sector and optimize the capital and credit flow.
MSME and Indian Economy:
It is almost impossible to talk about the economic status of our nation without mentioning the role of MSME. With an astounding 30 million units that provide job and income opportunities to more than 70 million individuals both rural and urban, the MSME sector stands tall in the count of the Indian economy.
One of the highly integrated categories of MSME is the manufacturing sector. The manufacturing units spread across the country have accounted for the production of 6000 products to date. This magnanimous performance makes for 45% of India’s manufacturing output. Apart from this, the exports of manufactured goods via the MSME sector contributes 40% of the country’s total export.
So, what were the reasons behind such a large explosion of the MSME sector in India?
These causes can be traced back to the opportunities available for the MSME sectors such as:
- MSME sector is on the lower end of the capital requirements as such enterprises function on a grassroots level and do not involve a truckload of finances for their operation.
- One of the more important reasons behind such a widespread growth of MSMEs is the recognition this sector received from the Government. There has been a huge array of schemes that directly aim to cater to the needs of MSMEs and their business owners. Whether it is small business SME loans, unsecured business loans, finances, special subsidies, or employment programs, MSMEs have been a top priority for the government over the years.
- Another initiative undertaken by the Government is that of providing reservation to the manufacturing sectors. The government also provides exclusive purchase reservations to MSMEs.
- When compared with large businesses, MSMEs have an easier strategy for procuring machinery and the raw material for business.
- MSMEs require less intensive training programs for their labourers and other man-power. This supports a higher production rate as compared to some large-scale industries where technical skill is a pre-requisite for the employees to work.
- MSMEs boost the trade and export of the country. As these business sectors provide a high-rate business production, there are surplus products available for independent use and export.
- MSMEs serve to promote the production and popularity of Indian products. This is beneficial in building the economy of the country and putting Indian products on the World map.
MSME sector has helped in creating awareness about our country’s rich cultural heritage, knowledge, and technical skills that make us unique. This sector lets the phrase ‘unity in diversity’ shine throughout the world by bringing a variety of unique businesses into existence.
Recent developments concerned with the MSME sector:
While there have already been several developments aimed at increasing the output of MSMEs, the newer schemes continue to roll in to change and improve the scenario of small-scale industries. The Government has also introduced new guidelines for the operation of the MSME sector under the Union budget of 2020. Some of these new developments are mentioned below:
- Udyam registration: Government has introduced a new form of registration for MSMEs that is known as ‘Udyam registration’. This registration process is much simpler than the traditional one as now all the MSME business owners can complete the registration of their enterprise online on their own. The process requires the individual’s Aadhaar number. This initiative was majorly aimed to increase the involvement of more small business owners in the production and manufacture. Another objective was to encourage new business owners to start their business.
- Emergency credit: Access to credit and cash flow has been a hot topic of discussion regarding the MSME sector. There have been many anomalies regarding ill-distribution and even lack of credit to the MSME business owners where the entrepreneurs felt stranded for finances. To overcome such difficulties, the government has announced a special emergency credit for MSMEs. As the business owners struggle with outstanding finances, the government has promised to provide around 3 trillion as an emergency credit line to be used as a loan by the MSME business owners.
- Debt scheme: Several MSMEs have struggled to allocate equity funding for their business. To support the business owners the government has delivered a sub-ordinate debt scheme that shall facilitate a debt of 15% contribution from the promoter. The limit to this debt shall amount to Rs 75 Lakh. The government has enabled banks to provide funding as promoter contribution that will be guaranteed by the government. This scheme is aimed to fulfil the requirement of an equity fund for the MSME sector.
- Funds of fund scheme: Another scheme presented by the government under which a financial aid of Rs10,000 crore shall be curated to support the rising MSMEs.
- Champion’s portal: A new online platform has also been launched by the government to provide expert help, raw materials, machinery and labour, business loans, permissions, etc. to the MSMEs.
- Atmanirbhar Bharat package: This is the latest development strategy that was introduced in the Union budget of 2020. The package is aimed at supporting the rise and development of MSMEs and providing a variety of relief funds and financial aids. The plan has also withdrawn the global tenders that were introduced during the 2017 plan.
- The world bank has also supplied financial aid targeted at MSMEs amounting to Rs.5,600 crore.
MSME sector: What does the future hold?
The current time has been a vital footprint in the world of MSMEs.
With the latest ‘Atmanirbhar’ package announced by the government, the main focus shall be a reboot of the micro, small, and medium businesses. This package also aims to solve the present scenario of credit pinching and limits of credit access. It is also a very likely scenario that the classification of MSMEs will shift their focus from the manufacture and service base to another criterion.
Even after all these MSME development schemes were introduced in the country, a major problem still remains in the face of a lack of resources. MSMEs being a sector with limited power and capacities, the business owners often encounter a low availability or limited availability of resources such as raw material, labour, land, and capital. But this is only the tip of the iceberg because the major limitation prompts the credit flow.
Not only do MSMEs face a lack of credit but a majority of them don’t even have the access to it. India has to solve the crisis of credit flow in the MSME sector if we fully wish to utilize the economic potential of this sector.
The MSME sector has emerged as one of the key factors behind rural industrialization and employment generation in the country. With new advances and developments put forth by the government, we can say that the scope of the MSME sector is definitely on the positive side.
The boost of the ‘Make in India’ campaign will also help MSMEs flourish and develop a variety of production systems and different demand structures that will prove to be a boon for the harmony of consumer products, technology, and processes. The dawn of the MSME sector shall bring a new wave of businesses owing to the process of liberalization and support from the government.
MSME finance:
As the future of the MSME sector is likely to see positive growth, it is wise for the entrepreneurs to gather knowledge about the various finance opportunities that are available for the MSMEs.
One of the prime MSME finance options comes in the form of an MSME loan.
MSME loan:
As the name suggests, an MSME loan is a financial agreement between the lending institution (which is commonly a bank) and the business owner.
MSME loans are a smart capital resourcing strategy for small-scale businesses as the owners of such businesses often face the problem of lack of capital assets to either start or maintain their business.
The general features of an MSME loan are:
- The interest rates of such a loan range from 9.75% to 18%. The interest rate imposed on a particular MSME loan depends on the requirements of business owners and the lending authority.
- MSME loan can be availed for a maximum limit of Rs.1 crore.
- There is no minimum limit for the amount of MSME loan that can be sanctioned for a single application.
- The general rule of loan repayment for such loans ranges between 1-5 years.
- MSME loan can be both secured and unsecured i.e. collateral is not compulsory for the loan.
- An MSME loan may charge a processing fee during the application process. This fee may go up to 4% of the loan.
- A foreclosure charge of up to 5% may be charged from the outstanding loan amount.
- There may be a part-payment charge involved in an MSME loan.
The eligibility of MSME loan are as follows:
- An MSME that may be either public or private, sole proprietor and partnership.
- A business with a record of ITR for at least 2 years, a fair credit score, and no repayment backlog.
- Applicants within the age of 18-66 years are eligible for MSME loan.
Procedure to apply for an MSME loan:
MSME loan is a great option for MSME finance and various lending institutions offer loans to business owners such as Banks and NBFCs.
To apply for an MSME loan the applicant should:
- Procure the loan application form from the lending authority of choice.
- The applicant should complete the loan application form by providing the required credentials and the details of the loan such as premium and tenure.
- Then the business owner may submit their application by attaching the required documents.
- After the process of document verification, the loan goes into approval and further for sanctioning.
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