Over the years, MSME industry is playing a vital role in the economic growth of a developing India. Lack of sufficient and timely finance impact the overall growth as well as the expansion of any small business firms that are recently formed. Many reasons are there in which limited resource is top most one. Due to smaller sizes and resources, these business sectors have a very limited ability for withstanding any shock. Most of the small sector business firms operate with an inadequate amount of funds and capitals. This is an informative write up which is basically targeting the standing of instant finance in MSME business development.
Also Read: India Eyes To Be The Leader Of MSME Industry
Role of capital in the growth and development of newly formed business
Without borrowing funds from banks or other financial sectors, these companies fully depend on the revenue generated. Sometimes, small companies completely depend on the owner’s capital and finance, which inhibits their potential for long-term growth and expansion. Lack of product variants and low technology level are some of the concern that cannot be handled and addressed properly without the timely and sufficient availability of finance and credit. MSME enterprises can invest in creating a wide distribution network, research & development, technical know-how, a brand creating etc. when they have the timely and adequate amount of finance and funds. The problem of the timely release of payments for their products or services can also be faced by these businesses, being a supplier of any large enterprises. Delay in payment can put pressure on their financial conditions and working capitals that impact their business operations severely.
NBFCs may be preferred by MSME business groups
So many small and medium business sectors in India takes credit heavily from non-banking financial service providing companies due to their least usage of paperwork and quicker release of finance as compared to formal banking systems in India. NBFCs have attracted many newly formed business ventures due to their simpler process, timeliness, and convenience. The credit information of small and newly formed business ventures is not easily available to banks. It is not cost effective for banks to collect credit information on a large number of small and medium businesses. Often banks add the cost of information asymmetry into the lending rate, which makes the taking loan from banks little expensive for owners of small business groups as compared to non-banking financial organizations. Procedural delays, information asymmetry, collateral and rigid loaning policies of the bank have caused small business ventures to avail low-interest business loans from non-banking financial institutions.
Banks in India hesitate to provide loans to newly formed small businesses
Newly formed business groups largely depend on self-finance. Due to insufficient assets and low capitalization, small business groups in India are considered to be high-risk borrowers by the organized banking systems. The reach of banking systems has been limited in financing a small business. Banking firms consider these businesses to be highly vulnerable to economic. Moreover, banks consider that marketing fluctuating of these small groups have an extremely high mortality rate. Hence, banks hesitate to provide loans to small or medium ventures that are newly formed; non-banking agencies are playing their roles here.