The The Impact of Microfinancing on the Growth of India's MSME Sector: An Exploratory Study

Microfinancing and its impact on the Growth of India's MSME Sector

Abstract

The Micro, Small, and Medium Enterprises (MSME) sector in India plays a crucial role in driving employment opportunities and economic growth. Although most MSMEs are unregistered, they contribute 45 per cent to industrial output and 40 per cent to overall exports. These enterprises have been instrumental in industrializing rural and backward areas, reducing regional imbalances, and promoting equitable distribution of national income and wealth. However, the MSME sector faces several challenges and requires support to capitalize on opportunities in the rapidly evolving global markets. Consultancy services can aid MSMEs in enhancing their competencies in areas such as marketing, finance, business development, operations, and technology. The success of MSMEs is pivotal to rural and regional development, making them a vital component of the economy.

A substantial number of Indian MSMEs rely on self-funding due to limited financing opportunities, especially for micro-enterprises, which comprise nearly 95% of all MSMEs. Late payments by larger enterprises often pose challenges for MSMEs in managing their receivables. The Factoring Regulation Act of 2011 presents a potential solution, expected to boost the factoring industry in India. Factoring services offer advantages such as open account facilities and increased credit limits as sales grow. To support MSMEs, financial institutions in India should be more proactive in providing finance against factored receivables.