Experts advocate cost reduction, tech adoption, and inclusive financial policies for propelling MSME sector

As India continues to witness rapid economic growth, the importance of supporting its small and medium-sized enterprises (MSMEs) becomes increasingly evident. However, this crucial sector is faced with challenges such as limited access to organised finance and being underserved by traditional banking institutions.

Aseem Dhru, MD & CEO of SBFC Finance, emphasises the untapped potential in the micro end of the MSME market. With approximately 64 million businesses in India, only 9-10% have access to organised finance.

Dhru highlights the ubiquity of these businesses across the country as a significant challenge. He suggests that addressing this challenge could result in substantial payoffs for both the businesses and the financial institutions serving them.

Dhru identifies two critical factors that could significantly benefit MSMEs. First, he emphasises the high impact cost of transactions for these businesses, citing stamp duties on loan agreements and mortgages as burdensome. By re-evaluating and potentially reducing these costs, the financial burden on MSMEs could be alleviated.

Second, Dhru calls for a level playing field for Non-Banking Financial Companies (NBFCs) by extending the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, currently available for Housing Finance Companies (HFCs) and banks beyond ₹1 lakh, to NBFCs.

Sumant Rampal, Head of Business & Rural Banking at HDFC Bank, observes a positive shift in the mindset of micro, small, and medium enterprises towards technology adoption.

He notes the impact of the Goods and Services Tax (GST) stack, emphasising the importance of structured working and data utilization. Rampal predicts a trend towards miniaturisation of credit as banks and NBFCs leverage available data to provide credit more efficiently.

Rampal highlights the government's focus on supporting MSMEs, particularly during challenging times like the COVID-19 pandemic.

"I feel there's a lot of focus on MSMEs from the government. If you see the schemes during COVID, the whole support that was provided, all are beautiful schemes for most of the MSMEs to go out and use for financing, and then along with that will come data, along with that will come growth for them. So, this is the right framework that is getting created,” Rampal stated in a conversation with CNBC-TV18.

Siddharth Parekh, Senior Partner & Co-Founder of Paragon Partners, identifies the SME space as a significant investment opportunity. Paragon Partners focuses on the mid-market space, targeting businesses that have proven product-market fit and have scaled to a certain degree. Parekh highlights the substantial funding gap in the SME sector, providing an opportunity for growth capital investments to help these businesses scale up.