The contribution made by the informal sector to India’s economy is substantial.

There is no denying the fact that our nation’s growth relies considerably on micro, small, and medium enterprises (MSMEs) that contribute significantly to the GDP by generating mass employment in every nook and corner of India. In view of its significance, the government is expected to provide adequate support to ensure MSMEs’ growth does not get hamstrung at any point, especially in the middle of a pandemic that has brought major global economies to a standstill.

Among all the sectors, MSMEs were badly hit following the lockdown as industries remained closed for more than two months between March-end and June. The current economic situation is not conducive to small industries as there is restricted liquidity in the system, though the government pumped in stimulus to keep the sector alive. Although the government has introduced several economic measures in terms of financing, certain gaps remain that prevent the sector from functioning well. Let us take you through the top challenges that cripple the industry.

1. Ease of doing business remains a bottleneck

Most start-ups in India face the problem in the initial stages because of too many regulations and approvals. Even as India managed to jump places in the World Bank’s Ease of Doing Business index, there are several loopholes in the system that keep businesses on the edge and prevent them from expanding or flourishing. Many times, entrepreneurs are demotivated to start up because of troubles relating to MSME loan, enforcing contracts and dealing with construction permits. In fact, the time taken by businesses to enforce a contract remains longer, at 1,445 days, than it was 15 years ago (1,420 days). There have been significant changes in terms of registering a new business which has come down to 30 days from 127 days, local entrepreneurs have to still wait and clear 12 procedures to start a business in Mumbai, whereas globally it takes just five procedures on an average.

2. Lack of financial expertise

Even as entrepreneurs keep devising new strategies and plan the expansion of their existing business, there are still a large number of entrepreneurs who lack the financial knowledge to steer the business in the right direction. Those entrepreneurs without sound financial knowledge may not be in a position to make crucial business decisions related to MSME loans. In absence of financial knowledge, you may end up taking wrong decisions that may cost the business unless you are seeking any external advice. Also, the knowledge about finance is important because you have to rely on an MSME loan to tide over crises that may knock at the door anytime. Hence, it is important to understand everything related to MSME loans, find out about the MSME loan interest rate and compare the same in the market before availing a loan.

3. Lack of Access to Financing Solutions

Most businesses face perennial problems of accessing finance or availing an MSME loan even as the government has implemented measures to make credit for businesses readily available to foster entrepreneurship. The regulatory loopholes that cause a delay in getting licenses, insurance, and certifications also hamper the prospects of MSMEs. Most businesses face problems related to manufacturing, timely purchase of raw materials, or even access to new technologies or acquire new skills due to lack of funding. Another major problem is the economic slowdown that has led to liquidity crunch, but the government had given a breather to MSMEs by asking banks not to declare any stressed loan account of MSMEs as NPA till March 2020 and work on recasting their debt.

4. Technology remains a major deterrent

Most businesses fail to reap the benefits of the latest technological developments in their sector due to a lack of expertise and awareness. Hence MSMEs need to be apprised of the technological developments that are significant for the growth of their businesses. It is important for scientific research bodies to remain involved with the local MSME clusters, and take notice of their technology-related problems and issues. However, there have been concerted efforts to offer solutions to MSMEs on these issues as the government is working towards the launch of E-commerce portal ‘Bharat Craft’ that will act as a direct interface between sellers and buyers.

5. Labour issues

Most SMEs face frequent labour issues and especially in the new normal times, the ongoing migrant crises has manifested itself as one of the most difficult areas for industries to operate in such times of pandemic. Apart from labour problems, businesses also need to emphasize skill development, training, and ensuring market linkages to facilitate both urban and rural micro-entrepreneurs. The emphasis on skill development can benefit the sector substantially and more so at the time of crisis.

6. Lack of Trust 

It is seen that banks refrain from extending MSME loan since the amount remains small and also, banks believe MSMEs lack the required repayment capacity. In such a situation, they end up implementing stricter regulations on these start-ups. Some businesses also fail to keep track of their credit rating that hampers the prospect of availing loans. Moreover, traditional lending options make it difficult for business owners to meet strict eligibility criteria besides the lengthy procedure of MSME loan approval further dampens their spirits.

7. Absence of collateral in loan

Some businesses may find it difficult to avail MSME loan as a result of a strict collateral protocol. Since small companies may not have the property to substantiate the criteria to avail a loan, business owners may opt for unsecured business loans from lenders and not fret over offering collateral or assets to get the MSME loan approval.

Despite these challenges, the success in business is not elusive if you are determined and these problems can be easily addressed if you get the right support from the lender.