World Bank today approved USD 500 million loan for its MSME Growth Innovation and Inclusive Finance Project to improve access to finance for Indian small and medium enterprises in manufacturing and services sector.
The Project will support MSMEs through direct financing by the Small Industries Development Bank of India (SIDBI) and Participating Financial Institutions (PFIs) across three components. These include support to startup debt financing and risk capital as well as support to service and manufacturing sector financing models.
"With eight million people entering the labour force every year, MSMEs have the potential to create many new, innovative jobs. However, for these ideas to take shape, MSMEs will need easier access to finance. This project will develop innovative products that address such constraints and help them achieve their true potential," said Onno Ruhl, World Bank Country Director in India.
The project will also support manufacturing MSMEs through financial products such as Loan Extension Services (LES) and cluster financing -- including women-led clusters. Particular focus will be to expand manufacturing activity in financially underserved areas, including low income states especially through refinancing, as banks and other PFIs have a deeper network in these states. The project will develop SIDBI's ability to scale up debt financing as India's startup ecosystem is currently one of the fastest growing in the world.
In the last 3 years, Indian start-ups have attracted some 300 venture capital and 225 angel investment deals worth over USD 2.3 billion and over 20 mergers and acquisitions worth USD 1 billion.
The loan, from the International Bank for Reconstruction and Development (IBRD), has a 5-year grace period, and a maturity of 18 years. In India, MSMEs account for more than 80 per cent of total industrial enterprises, produce over 8,000 value-added products and employ an estimated 60 million people.
The sector contributes 45 per cent to manufacturing output and about 40 per cent to exports, both directly and indirectly. In addition, over 50 per cent of MSMEs are rural enterprises and widely distributed across low-income states making them an important sector for promoting economic growth and poverty reduction. However, lack of adequate finance is one of the biggest challenges facing the MSME sector.
Financial institutions have limited their exposure to the sector due to a higher risk perception, information asymmetry, high transaction costs and the lack of collateral.
The MSME census of 2006-07 estimated that about 87 per cent of MSMEs did not have any access to finance and were self-financed. Credit towards micro and small enterprises represent only around 13-15 per cent of formal financial institutions portfolio.
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