Setting up of Micro, Small and Medium
Enterprises (MSMEs)
The process of setting up an MSME is crucial in entrepreneurial development and industrial
expansion. MSMEs act as engines of growth, fostering innovation, employment, and balanced
regional development. Setting up an MSME is not merely about production; it requires careful
planning, compliance with regulatory norms, and accessing financial and technical resources.
The first step is idea generation and opportunity scanning. Entrepreneurs must identify gaps
in the market, new technological trends, customer needs, or areas of governmental push (such
as renewable energy, food processing, textiles, etc.). Following this, a feasibility study must be
undertaken, analyzing technical, market, financial, and managerial viability.
Once the project is deemed feasible, the entrepreneur must prepare a detailed project report
(DPR), outlining objectives, production processes, financial projections, marketing strategies,
and risk assessments.
Registration is critical. Under the MSMED Act, 2006, MSMEs should file a Udyam Registration
online, which provides them access to subsidies, priority sector lending, and government
procurement preferences.
Subsequent steps involve:
● Acquiring necessary licenses (Factory License, Trade License, Pollution Control
Clearance where required),
● Arranging finance (through banks, NBFCs, or government schemes like MUDRA loans,
Stand-Up India),
● Procuring land and machinery,
● Hiring skilled and unskilled labor, and
● Commencing production and marketing activities.
Support institutions like the District Industries Centre (DIC), NSIC, and SIDBI play pivotal
roles at various stages by offering funding, training, and advisory services.
2. Significance of Location for MSMEs
The choice of location critically influences the cost structure, operational efficiency, and market
access of an MSME. Unlike large industries that can absorb high logistics costs or negotiate
better infrastructure, MSMEs are extremely sensitive to locational advantages or disadvantages.
Factors making location significant include:
● Availability of Raw Materials: Setting up close to raw material sources ensures lower
transport costs and continuous supply, especially for industries like food processing or
textiles.
● Access to Markets: Proximity to urban centers or export hubs enhances market reach
and reduces shipping and distribution expenses.
● Infrastructure Facilities: Availability of power, water, communication, transportation,
and banking facilities can make or break MSME operations.
● Labor Supply: Ease of access to skilled and semi-skilled labor ensures operational
continuity.
● Government Incentives: Many state governments declare certain areas as "Backward
Areas" or "Special Economic Zones" (SEZs) offering tax exemptions, subsidized land,
and infrastructure, making them attractive locations.
An imprudent choice of location, such as setting up far from customers or suppliers, can
severely impact the cost competitiveness and survival prospects of an MSME.
3. Green Channel for MSMEs
The Green Channel facility is an innovative mechanism initiated by government departments
and Public Sector Undertakings (PSUs) to streamline procurement processes from MSMEs.
Once a vendor is accredited for consistent quality and reliability, subsequent procurement
orders from the vendor can be processed without repeated inspections or verifications.
The main advantages of the Green Channel are:
● Reduction in Bureaucratic Delays: MSMEs can supply products faster without waiting
for inspection clearances every time.
● Lower Transaction Costs: Reduced compliance overheads save MSMEs money and
time.
● Trust-Based Partnership: Encourages long-term, stable supplier relationships between
MSMEs and public agencies.
Thus, the Green Channel recognizes and rewards consistent performance, improving the
working environment for small businesses.
4. Bridge Capital
Bridge capital is short-term finance provided to MSMEs to "bridge" immediate financing gaps.
This is especially critical during the early stages of a project where there is a time gap between
sanction of long-term loans and actual disbursement or in cases where an MSME is awaiting
the realization of receivables but needs immediate cash to meet operational costs.
In practical terms, bridge loans allow entrepreneurs to:
● Start construction,
● Order equipment,
● Pay vendors and staff,
● Meet urgent short-term liabilities.
Institutions like SIDBI and commercial banks extend bridge finance typically for periods up to 12
months. This tool is vital because MSMEs often operate on thin margins and cannot afford
working capital disruptions.
Example:
A startup manufacturing electric scooters may need bridge funding to import motor components
before its term loan is released. Bridge capital enables continuity without risking customer
deadlines.
5. Seed Capital Assistance
Seed capital is the earliest stage financing needed to develop a business idea into a concrete
project. Entrepreneurs, especially first-generation ones, often lack sufficient personal savings to
undertake even preliminary expenses like feasibility studies, prototype development, and
early-stage working capital.
Recognizing this gap, institutions like SIDBI, State Financial Corporations (SFCs), and State
Industrial Development Corporations (SIDCs) offer seed capital through dedicated schemes
like the National Equity Fund.
Key features of seed capital assistance:
● Offered as soft loans (low interest or deferred repayment),
● Sometimes convertible into equity,
● Targeted at technically qualified entrepreneurs, economically disadvantaged groups, and
projects in priority sectors.
Without seed capital, many innovative and socially beneficial projects would never move beyond
the conceptual stage.
6. Margin Money Scheme
Margin money refers to the entrepreneur’s own contribution towards the total project cost, while
the remaining portion is financed by bank loans. In practice, MSME entrepreneurs often struggle
to meet high margin requirements, leading to project delays or cancellations.
To support entrepreneurs, Margin Money Schemes provide partial financial assistance. For
instance:
● Under the Prime Minister’s Employment Generation Programme (PMEGP), the
government provides a margin money subsidy ranging from 15% to 35% of the project
cost.
● The entrepreneur's contribution is thus reduced to just 5–10%, making it easier to avail
loans.
Margin money acts as a guarantee of the entrepreneur’s commitment while reducing risk
perception for banks. It also ensures broader financial inclusion by allowing disadvantaged
entrepreneurs to access formal credit.
7. Sickness in MSMEs: Causes and
Remedies
📌 7.1 Causes of Sickness
Sickness among MSMEs is a grave issue in India, with thousands of units becoming
non-performing every year. Sickness arises when units are unable to generate internal
surpluses to sustain operations, leading to mounting losses, loan defaults, and closure risks.
The primary causes are:
● Internal Factors:
○ Poor financial management, unplanned expansion, diversion of working capital.
○ Lack of managerial expertise, absence of cost control, poor inventory
management.
○ Outdated technology leading to low productivity and poor quality.
● External Factors:
○ Power shortages, infrastructural bottlenecks.
○ Changes in government policies, increased competition from imports.
○ Delayed payments from large buyers (public sector or private corporates).
The Reserve Bank of India (RBI) classifies an MSME as sick if it has incurred cash losses for
two consecutive years and has an erosion of 50% or more of its net worth.
📌 7.2 Remedies for Sickness
To rehabilitate sick MSMEs, a coordinated approach is necessary:
● Early Diagnosis: Regular monitoring and early detection of warning signs (like
continuous cash losses) are crucial.
● Financial Restructuring: Banks can reschedule debt repayments, provide additional
working capital, or convert debts into equity temporarily.
● Technological Modernization: MSMEs must adopt better technology to improve
productivity and reduce costs, often supported by schemes like the Credit Linked
Capital Subsidy Scheme (CLCSS).
● Marketing and Export Support: Help MSMEs find new markets, develop better
branding strategies, and participate in trade fairs.
● Government Support: Cluster development programs, sick unit rehabilitation schemes,
and credit guarantee schemes offer policy backing.
Institutions like SIDBI, MSME-DIs (Development Institutes), and banks play critical roles in
implementing these measures.
Example:
The revival of the Indian handloom MSMEs through government support under schemes like
SFURTI (Scheme of Fund for Regeneration of Traditional Industries) demonstrates effective
sickness rehabilitation.
