Reluctance on part of financial institutions on extending credit, demand for collateral, sizeable documentation process, and faster credit disbursal through informal channels were the reasons behind MSMEs tapping money lenders
NEW DELHI: Almost a third of the micro, small and medium enterprises in Tamil Nadu are either tapping or ready to tap money lenders for cash amid the current difficult times, indicative of the challenges faced by such entities in availing institutional credit, according to survey results of IIT Madras.
Conducted in collaboration with MSME federations to assess the impact of covid-19 on these firms in Tamil Nadu, the survey found that 31.3% of the respondents were looking to access finance from money lenders.
Reluctance on part of financial institutions on extending credit, demand for collateral, sizeable documentation process, and faster credit disbursal through informal channels were the reasons behind MSMEs tapping money lenders.
“This is indicative of the challenges the micro and small factories are facing in accessing formal credit after their businesses got hit by the pandemic. It’s not that money lender system was not there in Tamil Nadu before covid-19, but entrepreneurs looking to tap money lenders in a larger way is pointing to a systemic challenge," said Subash Sasidharan, a professor at IIT Madras, and one of the lead authors of the survey.
“Our survey shows while earlier around 21% were open to this informal source of credit, in current environment this is now 31.3%. Of course, the main source of finance is still commercial banks…but what is revealing was almost one third of the enterprises are ready to tap money lenders given the exorbitant interest they charge," explained Sasidharan, adding that this is where there is a need to work on the policy of financial inclusion.
Of the 1,200 companies surveyed, 45% believe that banks' reluctance to lend to MSMEs is a primary hindrance in accessing institutional finance, while 21% cited the mandate for collateral securities, and almost 15% said higher interest rate are other key factors stopped them from taking bank loans.
About 68.1% of the surveyed said they have just one month’s cash flow and over 27% said they have enough to sustain for 1-3 months.
Tamil Nadu has robust MSME and industrial clusters across services and manufacturing segments but the pandemic has led to loss of business for about 75% of such firms, according to the survey. While those engaged in manufacturing reported over 50% loss in revenue, others in transport, software development, solar photovoltaics reported over 80% drop in business.
And business loss has a direct bearing on the jobs. Of those surveyed, over 55% said they have or will lay off employees. About 18.3% of MSMEs have laid off or will lay off over 50% of their workforce, while 6.2% said they will sack 30%-50% of their staff.
“Improved access to finance, with reduced interest rate on loans and simpler processes, is an essential step that would help businesses deal with the immediate aftermath of the crisis. There should be targeted credit support policies aimed at supporting the micro segment. Tamil Nadu can introduce State Enterprise Development Grant," said Santosh Sahu, an assistant professor of industrial economics at IIT-M and co-author the survey.
Sahu said the survey, a copy of which was submitted to the state government, has advised reduce documentations, "increase borrowing for MSMEs" and capping the interest rate at 4-5%.
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