Lack of credit, without an iota of doubt, is one of the major challenges facing the Indian Micro, Small and Medium Enterprise (MSME) sector. Small business owner often find banks reluctant to provide loans to them and this the reason why the sector has long been facing credit crunch, and according to latest RBI data released last week, bank credit flow to MSMEs sharply decelerated in the first three months of the current fiscal.

Bank credit growth to medium industries grew by 13.2% in June against 47.8% in the year-ago month while growth to micro and small industries grew by 13% against 29.2% a year ago. According to past RBI data, loan growth of medium industries was 19.1% (53.7% a year ago) and 18.9% (42.9% a year ago) in April and May, 2023 respectively. Similarly, growth in the case of micro and small industries was 9.7% (against 29.8% a year ago) and 9.5% (32.7% a year ago) in April and May, respectively.

This data further shows that gross bank credit outstanding to medium industries at June-end was Rs 2,63,440 against Rs 2,32,776 crore in June 2022 while in case of micro and small industries the amount stood at Rs 6,25,625 crore against Rs 5,53,675 crore in the corresponding month last year. This data is concerning. The RBI, in 2018, had estimated that the overall credit gap in the MSMEs to be in the range of Rs 20 to Rs 25 lakh crore. It seems the situation is changing at a snail's pace.

The Centre has been doing a lot to ensure adequate and timely credit to MSMEs, but the approach of the banking system has hardly changed. Banks still consider MSME credit as a potentially bad loan. The banking ecosystem favours large borrowers but when it comes to MSMEs, they become risk averse to an unnecessary extent. This approach needs to be changed. Also, the government should come up with innovative solutions to address this gap.

I invite your opinions.