Micro, Small and Medium Enterprises (MSMEs) have emerged as a highly dynamic and vibrant sector in India over the past five decades. This sector not only strengthens rural and backward areas but also provides employment opportunities, making it an integral part of the socioeconomic growth of India. Complementing large industries, MSMEs contribute significantly to the country’s development.
What are Micro, Small and Medium Enterprises?
The Micro, Small and Medium Enterprise Development Act of 2006 categorizes enterprises based on their investment in plant and machinery:
● Micro Enterprise: An enterprise with an investment in plant and machinery of up to twenty-five lakh rupees.
● Small Enterprise: An enterprise with an investment in plant and machinery exceeding twenty-five lakh rupees but not exceeding five crore rupees.
● Medium Enterprise: An enterprise with an investment in plant and machinery exceeding five crore rupees but not exceeding ten crore rupees.
Types of Microfinance Organizations:
The following kinds of Microfinance institutions can be identified:
Joint Liability group:
On the basis of mutual assurance, this is typically a small, informal group of four to 10 people looking for loans. The most typical applications for loans are in the agricultural or related industries. Among the borrowers in this category are farmers, rural workers, and tenants. One of the structure’s core flaws, which has led to the partial collapse of the system, is personal preferences in loan lending.
Self-help group:
A self-help group is a group of persons from comparable socioeconomic backgrounds who come together to support one another. These small business operators get together for a brief time to create a communal fund to support their shared commercial demands. For instance, the NABARD SHG linkage program enables different self-help organizations to obtain bank loans given that they vouch for regular payments by their debtors.
Grameen Bank Model:
The main objective of this strategy, following the Grameen Bank model, is to strengthen the rural economy from start to finish. This strategy has not been fully used since rural credit and recovery systems continue to be a major problem. Numerous local banks also failed as a result of a sizable amount of non-performing assets. Self-Help Groups have performed better than this technique because they are more sustainable and better suited to India’s population density.
Rural Cooperatives:
Rural cooperatives were established in India during the period of its independence. Assets belonging to the poor were gathered, and banking services were paid for with this cash. It only benefited creditworthy customers in rural India and had complex standard operating procedures. This system consequently failed to deliver the expected outcomes.
Main features of Microfinance Institutions (MFIs)
The significant features of Microfinance institutions are as follows:
Small-scale borrowers
MFIs primarily cater to low-income individuals, underemployed individuals and those engaged in unofficial family businesses, such as small traders. These institutions extend financial services to individuals who may not have access to traditional banking services.
Credit risk investigation
Given that borrowers often lack official financial statements, loan officers visit the debtors’ homes and businesses to gather information. They keep records based on anticipated cash flows, payback schedules and credit amounts. This approach helps bridge the information gap and assess the creditworthiness of borrowers.
Utilisation of security
Unlike traditional banks that require extensive security conventions, MFIs focus on the financial organisation and value provided by the borrower. This allows them to extend loans to individuals who may not have collateral to offer but possess entrepreneurial potential.
Credit approval and checking
Micro-lending institutions follow a decentralised process for loan approval, often involving a loan committee. They heavily rely on the skill, reliability and timely information provided by loan officers. Precise and timely information is crucial for effective decision-making.
Controlling debts
Loan officers play a crucial role in supervising and managing loan repayments. They monitor customer information to ensure timely collections, reducing the risk of default and improving the overall loan portfolio quality.
The role of microfinance in funding Small and Medium Enterprises (SMEs)
Microfinance institutions have a significant impact on poverty alleviation and economic development, particularly in developing countries like India. SMEs play a vital role in providing employment and livelihood opportunities to a large section of society in these countries. Microfinance institutions fulfil the financial needs of MSMEs and facilitate their growth and expansion.
Microfinance institutions support MSMEs in various ways:
Easy access to credit facilities
Microfinance institutions serve as the primary credit and lending platform for MSMEs. They offer accessible loan facilities to both low-income individuals and medium-sized enterprises. Compared to traditional formal financial sectors, accessing loans from MFIs is relatively easy.
These institutions provide loans at affordable interest rates, simplified procedures and minimal documentation requirements, making it feasible for MSMEs to obtain the necessary financial support.
Inclusive policies
Microfinance institutions focus on the development of small enterprises that employ unskilled and semi-skilled labourers, particularly from economically weaker sections of society.
They design inclusive policies and develop simple business models to enhance the economic development of these enterprises. By extending financial services to underserved populations, MFIs contribute to the overall empowerment and upliftment of marginalised communities.
Support for business expansion
Microfinance institutions play a crucial role in supporting the expansion plans of MSMEs. They provide guidance, assistance and financing options for business expansion. By accessing funds from MFIs, MSMEs can increase the number of outlets, diversify their product offerings and become more competitive in the market.
This support not only benefits the MSMEs but also helps MFIs recover their loans and lend to other aspiring entrepreneurs, thereby fostering a cycle of growth and economic development.
Final Thoughts
MSMEs are a vital sector in India, contributing significantly to the country’s economic growth. Microfinance institutions play a pivotal role in meeting the financial needs of MSMEs and enabling their expansion. Through accessible credit facilities, inclusive policies and support for business growth, MFIs empower MSMEs and contribute to poverty alleviation and overall socio-economic development.
As India continues to progress, nurturing and strengthening the MSME sector, in partnership with microfinance institutions, will remain crucial for sustainable and inclusive economic development. For more details, connect with our experts at StartupFino.
