Financing Green MSMEs in
Small and Medium Enterprises’ (MSME) contribution to India’s economy and
employment has been significant. India with 63 million MSMEs, accounts
for about 45% of manufacturing output, more than 40% of exports and over
28% of gross domestic product. This sector employs about 111 million
people. MSMEs require low capital to start business, but create huge
With the national scenario of resource
extraction and disparate inequalities, it is imperative to focus on
alternative pathways towards equitable participation and reduced
economic contradictions - in order to meet our goals of sustainable
development. This requires India to enable a system that appropriately
localises and decentralises its production of goods and services while
also integrating economic efficiency, environmental soundness, and
social equity into business decisions.
Environmentally conscious Micro, Small and
Medium Enterprises – enterprises that build their business models on the
principles of resource conservation, resource efficiency, waste
management are critical enablers of green and inclusive economy at the
grassroots. Anecdotal evidence suggests that for the vast majority of
MSMEs, that are green in their nature and design as well as those aiming
to uptake greener ways of business operations, there is a lack of data
on the share of MSMEs that fall into this category and how that varies
across sectors and states.
Institutional Systems for Financing Green
Access to timely and adequate credit by
MSMEs at a reasonable cost is essential for growth of the sector. In
India, the total addressable demand for external credit is estimated to
be INR 37 trillion while the overall supply of finance from formal
sources is estimated to be INR 14.5 trillion. Therefore, the overall
credit gap in the MSME sector is estimated to be INR 20 – 25 trillion.
5% of enterprises have access to formal
finance. Access to finance tops the list with 31% of the MSMEs survey,
naming it as a challenge, followed by access to markets (28%), zeroing
down on the enterprise (23%) and possessing and procuring land (18%).
Only 1 out of 15 micro-entrepreneurs is able to access formal credit for
setting up a new enterprise.
According to reports by GIZ, almost 94% of
enterprises fall under the missing middle segment where credit
requirement varies from Rs.50,000 to Rs.10,00,000. While MFIs support
loans upto INR 50,000, banks are hesitant to support enterprises below
the 10 lakh threshold.
Status Quo Analysis
Despite an ongoing policy focus, growth of
MSME credit has been weak. Years of mandated lending have not produced
enough progress and new approaches are needed. At an overall level,
India’s banking system is still small relative to the needs of the real
sector. Against this backdrop, MSMEs find it challenging to access
Access to finance remains a further
continuing challenge for what could be called ‘green’ or ‘sustainable’
MSMEs – companies that seek to improve their environmental performance
or are providing innovative sustainability-related products and
The risks in turn can be traced to inability
to pay and unwillingness to pay. The former can in turn be traced to
business risk factors such as delayed buyer payments embedded in supply
chains or supplying to government entities and also other business
risks, including changes in consumer demand or extraneous events that
create a slow-down in the market. MSMEs often have little or no equity
buffers. Neither risk mitigation mechanisms are available to the MSMEs
nor to their lenders, so this inevitably translates into significant
credit losses. Even expected losses on these loans are not rationally
The second barrier is cost-to-serve.
Assessing the creditworthiness of a MSME can be difficult due to
information asymmetry, particularly with respect to financial
performance of the business. In the absence of collateral, under-writing
the customer often entails a “high-touch” approach which translates into
higher operating cost. This can be addressed by bringing greater
innovation in how small business loans are evaluated, underwritten, and
managed. Electronic KYC, paperless (digital) applications, rapid loan
underwriting and a greater emphasis on customer service can redefine the
lending to MSME sector.
The third reason is lender coverage. While
many urban areas have sufficient lender coverage, there is very poor
credit depth in large parts of the country. This remoteness translates
into weaker access to formal credit.
It is evident that a long-term strategy to
increase debt to MSMEs must take into consideration the cost-to-serve
and risk related issues so that it is not at odds with stability of the
banking sector. It also needs to leverage upon developments such as the
availability of GST data and emergence of new kinds of lenders to evolve
newer methods of MSME lending.
Over the past decade, a growing number of
solutions have been developed to help overcome these barriers.
Public Financial Institutions (PFIs): PFIs,
such as state-owned promotional banks, have often been the first to fill
financial gaps in the market for MSMEs. The Montreal Group has profiled
a range of debt and equity financing solutions ranging from the
establishment of cleantech venture funds through to targeted green
Commercial and stakeholder banks have
increased their commitment to sustainability across their loan book.
New initiatives such as the Principles for
Positive Impact could help to close the funding gaps facing MSMEs.
However, disclosure on how banks are responding to the specific
sustainable finance needs of MSMEs is generally low.
Green bonds offer a range of options for
MSME financing, including the issuance of green bonds from banks that
aggregate MSME loans, the securitisation of MSME loans into asset-backed
securities and the issuance of mini-bonds by medium-sized enterprises.
An added advantage of green bonds is greater market transparency.
Assets dedicated to investment products that
intentionally seek out enterprises delivering social, environmental and
financial returns are growing. These often build on traditional private
equity and venture capital financing models for both growth stage
companies and traditional MSMEs.
Anshul S Bhamra
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