Formal Financial System and Accessibility By MSMEs: A Survey

Abstract

In the growing phase and reforms to stimulate country’s economic growth and development in consistence with the theme of ‘Make in India’ the Micro, Small and Medium Enterprises (MSMEs) have significant contribution. This contribution is in the forms of employment, income, entrepreneurial skills, and innovation largely generated by the MSMEs. Accordingly, their role is vital in strengthening economic growth and development, alleviating poverty and other socially related matters. In the forthcoming years, for developing countries, MSMEs will continue to be the engine for stronger, better and more sustainable growth, whereas in developed countries. Micro, Small and Medium enterprises (MSMEs) play a leading role in propelling economic growth, sustaining livelihood and in promoting equitable regional development.

MSMEs in India contribute around 12 per cent to the GDP, 45 per cent to industrial production, 40 per cent of exports and 15 per cent of employment and so contribute significantly in domestic and export earnings. Internationalization of SMEs can significantly help in generating domestic demand and increase consumption appetite, making the country overcome the pressure of economic slowdown. Presently, the Government is also taking major steps and has prioritized internationalization of SMEs for the economic growth of the nation.

The Formal Financial System in India has also initiated the process for support - namely export credit guarantees, pre-shipment financing, working capital financing, etc. but what is the perspective of promoters is an important question.

The purposes of this study are to identify the accessibility, challenges and obstacles for the MSMEs in utilizing formal financial system in the process of internationalization. The study also analyzes the factors considered by banks and financial institutions while extending financial assistance to the SMEs. It explores the reasons and identifies the gaps for the reasons of SMEs lacking in getting the priorities status to formal financing by the bankers even after contributing significantly to the economy. The study carried out a survey of the SMEs and major banks in the western India. The location and samples are identified based on the convenience of the researchers. The collected data are analyzed by using the statistical tools and techniques. The conclusions are drawn in the areas of obstacles and challenges of SMEs’ towards accessibility to formal finance in the process of internationalization and also assess inter-relationship between the MSMEs and the banks. The suggestions highlighted may be of great benefit to the promoters of MSMEs and the policy planners of the financial system in India.

Note: This paper was presented at the 19th Nirma International Conference on Management (NICOM 2016) on the theme of “Empowering Trade, Industry and Society in challenging and competitive Environment” organized by the Institute of Management, Nirma University (IMNU), Ahmedabad, India during Jan. 7-9, 2016. Paper is uploaded with the permission of IMNU and its contents may be cited with its source for academic purpose such as the brief quotations embodied in critical reviews and certain other non-commercial uses as permitted by copyright law. However, the copyright of this paper remains with (IMNU) and its permission is necessary for any commercial use.

Keywords: Formal Financing, MSMEs, SMEs Internationalization, Obstacles

JEL Classification: G1, G14, G15, G18, G2, G21, G28, E43