The MSME sector in India is a cornerstone of the country’s economy. Yet, there is a major gap in financing for MSMEs.
Causes of the Lending Bias
- A major reason is that MSMEs are often seen as high-risk, due to their inability or unwillingness to repay loans.
- There is limited visibility into an MSME’s finances due to poor record-keeping.
- MSMEs are often unable to provide a physical asset as collateral, demanding a high “cost to serve” from credit organizations.
- There are also often other roadblocks, such as complicated processes, gender bias, and long disbursal timelines.
Effect of the Credit Gap
Awareness of the credit gap has led to better schemes and measures for the MSME sector. Despite this, about 95% of the viable debt gap is due to MSMEs. Sadly, this gap has stopped many from contributing to the economy and even forced some to halt operations during the pandemic.
