A Case Study on credit delivery mechanism between Banks and MSMEs-An Analysis of factors

Research in progress

Monika Sharma, Research Scholar, Amity Business School, Amity University, Gurugram-122051,

monika_gurgaon@rediffmail.com

Dr. Vikas Madhukar, Pro-VC, Amity Business School, Amity University, Gurugram-122005

v.madhukar@ggn.amity.edu

ABSTRACT

The MSMEs is the backbone of Indian economy which has emerged as a most

important sector of Indian economy. Developing countries like India, in which

MSMEs play a significant part with respect to employment generation, development

of professional skill, sustainable growth of economy and export enhancement is

facing credit crunch since 2006. The availability and accessibility of funds always

remain a key issue in growth of MSMEs. The specialised and public sector and

private sector banks facilitate primary credit funding to MSMEs. The research

utilized primary data in the form of questionnaire from 220 bank employees and 193

MSME managers of Gurugram, Sonepat, Rohtak, Bahadurgarh and Faridabad. The

result analysed the factors which were extracted through exploratory factor analysis

technique to know the cause of gap of availability and accessibility between Banks

and MSMEs.

Keywords: MSMEs Banks, Schemes, Challenges, Government, Credit

Introduction

Based on MSMEs Ministry [1], MSMEs domestic and international market contributes 45% of

industrial output, 40% of total exports of transformation brought through banks in Indian economy.

The existing growth of MSMEs is 8% and expected to create a workforce for 12 million people in

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next three years. The employment generation in MSMEs sector is more than five times than large-

scale sector in India [2].

The structural reforms have brought changes in economic and financial policy of banks. The credit

flow has been increased due to Reserve Bank of India initiative. There must be priority sector lending

on the basis of specialized branches. The schemes are initiated time to time such as CLCSS, PMEGP,

Micro credit, technology and cluster development scheme but not utilized due to lack of awareness

and education. The most difficult task for MSMEs is to get a scheme passed from the government as

they think it’s a totally wastage of time. The various factors which create hindrances in MSMEs

success path are red tapism, bureaucracy, and corruption. The MSMEs act as flexible, effective,

efficient innovator in the country’s development. The production, employment and export are the

major sectors which gets immense assistance from SMEs. The entrepreneurs and risk takers are from

SMEs [3].

The first factor bank financing approach and access to credit to MSMEs that researcher wants to

examine is related to delivery mechanism between banks and SMEs. Challenges are considered an essential

element in implementing efficient delivery system. The other element is to check efficiency of

government schemes delivered through banks. Although schemes evaluation is widely used by

managers and business practitioners.

In addition, the performance of MSMEs has repeatedly been claimed to inability to fetch

support and assistance from various organisations. Although the role of organisations like Office of

Development Commissioner, Khadi and Village Industries Commission (1956), Coir Board (1954),

National Small Industries Corporation (1955), National Institute for Micro Small and Medium

Enterprises (1962) cannot be neglected at any stage. Apart from this Indian government support is

utmost required in lending support in effective implementation of schemes and

The researcher aim to contribute in improving Indian economy by raising the SMEs

challenges because MSMEs role cannot be forgotten in alleviating poverty and developing economy.

After all, the employment rate of SMEs is 40%, which is relatively high and GDP contribution is

30%.and GVA is 32% [1]. Thus consistent growth of MSMEs cannot be mentioned without the

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acknowledgement of its contributions.

Overall, this study will investigate how beyond government and banker support to Indian

MSMES are perceived, what are the various factors that hindrance in the progress of MSMEs, at the

same time bankers challenges needs to be known. Although a lot of work and research has been done

on underdeveloped economy, while only a few were conducted in developing economy like India. The

study also provides empirical evidence through factor analysis in the context of Banks and MSMEs. In the

end, this study will show how the successful implementation of government policies is required for

the betterment of MSMEs.

Objective

1. To analyse the various factors affecting the credit delivery mechanism of Banks to SMEs and also

study their impact on credit delivery mechanism of banks

2. To analyse the various factors affecting the credit accessibility to SMEs from Banks.

Review of literature

Shihadeh et al (2019) elaborates the casual relationship between SME sustainability and bank’s risk in

Palestine. The research aim was to find the influence of bank’s credit to MSMEs on non-performing

assets. The researcher observed that finance is the biggest obstacle in the growth and sustainability of

SMEs. Data were presented to 15 banks during the period 2006 to 2016 by empirical techniques. The

researcher found that growth and sustainability can be improved by credit increment. The study

recommended bank managers to develop strategies according to SMEs needs. The banking activities

are influenced by guarantee funds.

Mr. Abhijeet et al. (2018) studied the factors influencing financial gap for MSMEs sector and suggest

a credit rationing approach by the Banks in Varanasi (Uttar Pradesh). The study utilized secondary

data in the form of Review of Literature. The descriptive survey was carried on the 115 Bank officials

in Chandauli districts of Varanasi. Research used both primary and secondary data for analysis.

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Secondary data was collected in the form of MSMEs annual reports, SIDBI annual reports and

Handbook of annual statistics. Credit rationing adopted by banks further widens the gap between

MSMEs and Banks. And other factors were bankruptcy laws, property rights, moral Hazards etc. The

results of the survey indicated that MSMEs face or suffer more credit crunch than large enterprises.

Rao et al (2016) did a financial analysis of SMEs facing challenges in accessing credit in Andhra

Pradesh (India). A descriptive technique was used to ascertain the SMEs loan financing difficulties

from banks. The primary data collection method structured questionnaire was utilized to collect data.

The convenience sampling method was used for collecting data from 1200 SMEs (800 small

enterprises + 400 medium enterprises). The result highlighted that 12% of MSMEs required funds at

early stage i.e. start up. The fund requirement is fulfilled through banks. The various sources such as

friends, relatives, personal saving fulfils only 37% and 46% of funds requirement.

Mazanai et al (2012) examined the finance accessibility for SME sector in South Africa. The main

objective behind the study is to analyze financial gap between SMEs and financial institutions. The

analysis was supported by credit rationing of Stiglitz and Weiss (1981). The asymmetric information

and credit rationing behaviours were the main challenges for the lenders. The study found the various

challenges for MSMEs but accessibility of finance was the major one which hampered the MSMEs

growth. Thus it becomes necessary to resolve the financial problem and central government must

work hand in hand with the private sector.

Mohamad et al (2019) analyzed the role of “Credit Guarantee Schemes” of financing for MSMEs in

rural and urban areas of Indonesia. The Credit guarantee scheme is a popular financing scheme of

government. The aim of the research was to make a comparative analysis of impact of Credit

Guarantee scheme in rural and urban areas. The study used the survey (2007 and 2014) in collecting

first hand data. The government wanted to eliminate poverty by increasing the number of MSMEs.

The increased number of MSMEs would burdens banks for funds. The big number of MSMEs makes

banks out of reach. The survey found that finance acts as a bridge between banks and MSMEs. The

role of MSMEs becomes inefficient in absence of financing scheme. The result concluded that Urban

MSMEs have more opportunities of formal finance than rural MSMEs.

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Research Methodology

In this study, Credit delivery mechanism between Banks and MSMEs utilized a structured

questionnaire for MSMEs with a total of thirty questions containing general information in ist part

and specific information about schemes, sources of finance, non-financial problem, government

support on likert scale (5 points). The second part contains questionnaire for Banks having 30

questions,first part is about general information and second part is about specific information which is

also on likert scale (5 points strongly agree, agree, neutral, disagree and strongly disagree). The

questions were about schemes, NPA , collateral issues, Banks sector specific and geographic

approach, Banks definition criteria etc. The sampling procedure in this study used stratified sampling

using an online questionnaire distributed via google form to managers of banks and MSME

businesses in five districts Gurugram, Faridabad, Rohtak, Sonepat. Jhajjar (Bahadurgarh) and

analysed by expert opinion method and SMART PLS 3.2.9 software.

The study adopted an exploratory research design as it explores the various challenges and issues of

banks and SMEs on the basis of research objectives or research questions. The research is also

descriptive and analytical as it describes various factors in order to find the credit delivery of banks

and financial accessibility of SMEs. The participants in the study were SMEs and Bank managers of

NCR regions.

Analysis

The research utilized rotated component matrix and factors were extracted to evaluate the credit

delivery mechanism between MSMEs and Banks. The first factor from Banks perspective specifies

the biggest challenges for banks in credit delivery is registration of collateral as value is .866. The

second bigger challenge from Banks perspective is MSMEs less reliable projects and its poor finance

base. The third least important challenge is MSMESs lack of assets. The below mentioned factor is

from banks perspective.

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 Table 1. Factor 1-Bank Challenges

1 The increasing burden of NPAs and officers pressure of increasing profit force .506

banks not to support MSMEs.

2 There are issues in registering collateral (especially movable collateral) that inhibit .866

MSMEs secured lending

3 MSMEs lack of assets to meet collateral requirements is a biggest hurdle for banks .598

in providing loans.

4 Projects proposed by MSMEs are less reliable due to their low capacity of analyzing .794

projects and a poor finance base.

Source: EFA

The second most important factor in credit delivery from Banks perspective is effectiveness of Banks

schemes. Six schemes were evaluated on likert scale on the parameter of strongly agree, agree neutral,

strongly disagree and disagree. The best schemes of banks out of 6 schemes was PMEGP as value

stands at 0.871. The second best scheme is CGTMSE (Credit Guarantee Fund Trust for Micro and

Small Enterprise) as value stands at 0.866.The third best scheme out of six schemes was marketing

assistance scheme as value stands at 0.844. The fourth best scheme was COIR Vikas Yojna.0.797.

CLCSS (Credit linked capital subsidy scheme) and SFURTI (Scheme of fund for regeneration of

traditional industries) were at fifth and sixth rank respectively out of 6 schemes.

1 Is Credit Guarantee Fund Trust for Micro and Small Enterprise scheme .866

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 beneficiaries are satisfactory

2 Is Prime Minister’s Employment generation programme is up to the mark. .871

3 Are banks satisfied in terms of MSMEs Marketing assistance scheme beneficiaries .844

4 Are Credit Linked Capital Subsidy scheme beneficiaries are satisfactory or .796

increasing

5 Is SFURTI (Scheme of fund for regeneration of traditional industries) of KVIC and .775

COIR enterprises beneficiaries are satisfactory or increasing every year

6 Is Coir Vikas Yojna scheme beneficiaries are up to the mark .797

Table 2. Factor -2 Bank Schemes

Source: EFA

The value of Cronbach's alpha will generally increase for factors with more variables, and decrease

for factors with fewer variables. Each factor should aim to have at least 3 variables.The Cronbach’s

alpha coefficients for Bank Challenges dimension having 4 items was 0.752, Cronbach’s alpha

coefficients for Bank Schemes dimension having 6 items was 0.802.

Table 3. Reliability Test

Factors Private

Bank Challenges .752

Bank Schemes .802

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The below table 4 mentions one extracted factor out of Rotated component matrix of MSMEs

perspective i.e MSMEs challenges in raising finance from Banks. It is consisted of 4 items. The

biggest challenge for MSMEs in raising finance from Banks is unfair competition from large

enterprises in fetching funds as its value stands highest at 0.884. The second most critical challenge

for MSMEs is lack of collateral assets as its value is 0.833. The third challenge is MSMEs utmost

requirement of funds at initial stage as its value stands at 0.684. The fourth least important challenge

is less reliable services of banks for MSMEs as its value stands at 0.573.

Table 4. Factor 3-MSME challenges in raising finance from banks

1 MSMEs face unfair competition from large enterprises in competing for bank credits .884

2 Collateral is a prerequisite for getting loans in every type of financial needs .833

3 At initial stage you ask for financial support from banks and other financial .684

institutions, the better one source of finance

4 Services offered by banks to MSMEs are satisfactory from the beginning or they .573

have improved significantly.

Source: EFA

Table 5 presents the factor 4 of MSMEs hurdle in getting finance from banks. The biggest hurdle for

MSMEs is to acquire finance from Banks is to get finance from Commercial Banks as its value stands

at .950. The second biggest hurdle for MSMEs is to acquire finance despite of other problems as its

value stands at 0.915. The third hurdle for MSMEs is Non-Financial problems like marketing,

customer, transportation availability etc. The fourth hurdle is non-availability of collateral in

obtaining finance as its value stands at 0.588. The least important hurdle for MSMEs.

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 Table 5. Factor 4- MSME’s hurdle in getting finance

1 In your opinion Finance is a biggest challenge or barrier in MSMEs growth .915

2 You also suffer from non-financial problems like marketing, customer, transportation .750

availability etc.

3 Government measures taken for support creation and development of MSME finances are .549

satisfactory

4 less Collateral or no collateral is a biggest hurdle in obtaining finance from banks .588

5 It is difficult for MSMEs to get finance from commercial banks. .950

Source: EFA

Conclusion

The above research concludes there exists several factors between MSMEs and Banks which hamper

credit delivery mechanism between MSMEs and Banks. The factors were extracted with exploratory

factor analysis and Rotated component matrix was utilized. Rotated component matrix clubbed the

items under heads and reduced the factors. Thus factors were extracted between Banks and MSMEs

which affected the credit delivery of Banks and credit accessibility of MSMEs. In the end, we can

conclude that credit delivery mechanism could be improved from both banks and MSMEs side.

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