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Problems Faced by MSMEs in India

The Ministry of Micro, Small and Medium Enterprises, Government of India, highlighted several critical challenges faced by the MSME sector in July 2019. These challenges encompass a range of operational, financial, and technological issues that significantly impact their growth and sustainability.

1. Infrastructure Bottlenecks

  • MSMEs often rely on outdated business operation methods and low technology adoption, limiting their potential economies of scale.
  • They lack expertise in product development, designing, packaging, and marketing strategy, which is compounded by their small size.
  • It's advised that MSMEs should aim to expand gradually, reducing reliance on government incentives and striving to compete globally.

2. Lack of Access to Credit and Risk Capital

  • Access to reasonably priced credit is crucial for the competitive development of the MSME sector.
  • Credit disbursal has been sluggish, with the total credit outstanding from banks and NBFCs to the MSME sector at approximately ₹16.6 lakh crore as of the end of September 2019.
  • Scheduled commercial banks account for 90% of the total credit outstanding.

3. Delayed Payments

  • Many MSMEs, serving as ancillary units to large industries, face delayed payments, impacting their cash flow and working capital.
  • A survey by the Reserve Bank in December 2019 indicated that 44% of manufacturing MSMEs experienced payment delays, especially in sectors like basic metal, metal products, engineering, and construction.
  • Despite the MSMED Act, 2006 provisions for penalties on delayed payments, the weak bargaining power of MSMEs often prevents them from invoking these provisions.

4. Absence of Formalization

  • MSMEs operating informally face difficulties in creditworthiness assessment due to information asymmetry regarding their financial performance.
  • Their inability to provide collateral and small-scale operations limit their access to risk capital and government schemes, which often require digital identity and presence.

5. Inertia to Technology Adoption

  • There's a significant resistance within MSMEs towards adopting new technologies, which hinders their efficiency and market competitiveness.

6. Capacity Building

  • MSMEs need support in building their capacities to adapt to the rapidly changing business environment and embrace modern practices for sustainable growth.

These challenges underscore the need for targeted interventions by the government and private sector to support the MSME sector in overcoming these hurdles and contributing more significantly to India's economic development.

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