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Micro, Small, and Medium Enterprises

Current scenario in India:

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MSMEs contribute
6% to India’s GDP, 33% in Manufacturing Sector and 45% in Exports. This is a
dynamic sector that could pave the way forward for the Indian economy, by
providing employment to 60 million people through 28.5 million enterprises.i

Definition of Micro,
Small and Medium Enterprises in India

The MSMEs are defined on the basis of investment in Plant
& Machinery and equipments under the MSMED Act, 2006. ii

The present investment limit for MSMEs is as under:


“The enterprises engaged in the manufacture or production of
goods pertaining to any industry specified in the first schedule to the
industries (Development and regulation) Act, 1951) or employing plant and
machinery in the process of value addition to the final product having a
distinct name or character or use. The Manufacturing Enterprises are defined in terms of investment in Plant &

Micro enterprise: investment in plant and machinery
up to Rs. 25 lakh

Small enterprise: investment in plant and
machinery from Rs. 25 lakh to Rs. 5 crore.

Medium enterprise: Investment in plant and
machinery from Rs. 5 crore to Rs. 10 crore


“The enterprises engaged in providing or rendering of
services and are defined in terms
of investment in equipment.”

Micro enterprise: investment in equipments up to
Rs. 10 lakh.

Small enterprise: investment in equipments from
Rs. 10 lakh to Rs. 2 crore.

Medium enterprise: investment in equipments from
Rs. 2 crore to Rs. 5 croreiii


MSMEs offer an alternative underutilized route in the context
of continuing uncertainty in the agriculture sector because of substantial dependence
on rain-fed irrigation.iv Also,
in view of the continuing implications of climate change, it is necessary that
the MSME sector is prepared to absorb millions who may be rendered unemployed
in the agriculture sector. The
advantage of this sector is it requires less investment, thus creating
employment on a large scale, and reducing the employment and underemployment
problems. Moreover, this sector has shown tremendous resilience against threats
emerging out of still completion from both domestic and international market. vTherefore,
MSME is rightly said to be India’s “engine of growth”.


Policy Initiatives:

The schemes/programmes undertaken by the Ministry of MSMEs
and its organisations seek to facilitate/provide:

adequate flow of credit from financial

support for technology up gradation and modernization

integrated infrastructural facilities;

modern testing facilities and quality

access to modern management practices

entrepreneurship development and skill up
gradation through appropriate training facilities;

support for product development, design
intervention and packaging

welfare of artisans and workers

assistance for better access to domestic and
export markets and

Cluster-wise measures to promote
capacity-building and empowerment of the units and their collectives.


Ease of Registration
Process of MSMEs- Udyog Aadhaar Memorandum (UAM):

Ministry of MSME has notified a simple one-page registration
Form ‘Udyog Aadhaar Memorandum’ (UAM) on 18th September, 2015 in the Gazette of
India Vide Notification Number S.O 2576 (E). The simplified one page
registration form “Udyog Aadhaar” was made to change requirement of attestation
of documents to be replaced with self-attestation of document to promote
ease-of-doing-business for MSMEs. This helped increase the registrations of the
MSMEs to more than 2.30 lakh units.

Framework for Revival
and Rehabilitation of MSMEs

MSMEs have increased potential to grow but major obstacle is
inadequate or non-timely finance. The Ministry of Micro, Small & Medium
Enterprises has notified a Framework for Revival and Rehabilitation of MSMEs.
Under this framework any enterprise can seek revival and rehabilitation benefit
through a committee constituted by banks with representatives from State
Governments, experts and others.

The main features of the framework are as below:

(a) Identification of incipient stress: Before a loan
account of a MSME turns into a Non Performing Asset (NPA), banks/creditors are
required to identify incipient stress in the account.

(b) Committees for Distressed Micro, Small and Medium
Enterprises: All banks shall constitute one or more Committees at such
locations as may be considered necessary by the board of directors of such
banks to provide reasonable access to all eligible Micro, Small and Medium
enterprises which have availed credit facilities from such bank.

(c) Corrective Action Plan (CAP) by the Committee: The
Committee may explore various options to arrive at an early and feasible
solution to preserve the economic value of the underlying assets as well as the
lenders’ loans and also to allow the enterprise to continue with its business.

(d) Options under Corrective Action Plan (CAP): The options
under Corrective Action Plan (CAP) by the Committee may include Rectification,
restructuring and recovery 

(e) Restructuring Process: If the Committee decides
restructuring of the account as CAP, it will have the option of either
referring the account to Enterprise Debt Restructuring (EDR) Cell after a
decision to restructure is taken or restructure the same independent of the EDR
mechanism. If the Committee decides to restructure an account independent of
the EDR mechanism, the Committee should carry out the detailed Techno-Economic
Viability (TEV) study, and if found viable, finalise the restructuring package
within 30 days from the date of signing off the final CAP.

(f) Prudential Norms on Asset Classification and
Provisioning: While a restructuring proposal is under consideration by the
Committee/EDR, the usual asset classification norm would continue to apply. The
process of re-classification of an asset should not stop merely because
restructuring proposal is under consideration by the Committee/EDR. However, as
an incentive for quick implementation of a restructuring package, the special
asset classification benefit on restructuring of accounts as per extant
instructions would be available for accounts undertaken for restructuring under
these guidelines.

(g) Wilful Defaulters and Non-Cooperative Borrowers: Banks
are required to strictly adhere to the guidelines issued by RBI from time to
time regarding treatment of Wilful Defaulters.

(h) Review: In case the Committee decides that recovery
action is to be initiated against an enterprise, such enterprise may request
for a review of the decision by the Committee within a period of fifteen
working days from the date of receipt of the decision of the Committee.
Application filed under this section shall be decided by the Committee within a
period of thirty days from the date of filing and if as a consequence of such
review, the Committee decides to pursue a fresh corrective action plan for
revival of the enterprise shall apply accordingly

ASPIRE – A Scheme for
Promotion of Innovation, Rural Industry and Entrepreneurship

ASPIRE was launched to set up a network of technology centres
and to set up incubation centres to accelerate entrepreneurship and also to
promote start-ups for innovation and entrepreneurship in rural and agriculture
based industry.

Under the scheme:

80 Livelihood Business Incubators (LBI) and 30
Technology Business Incubators (TBI) to be set up by March 2017.

ii) A total of 1,04,000 incubates adequately
skilled and trained would be ready for taking the program forward.


1st Livelihood Business Incubator (LBI) has been
set up in Deoria, Uttar Pradesh on 15.04.2015 by NSIC.

Subsequently 21 LBIs have been approved with
sanction of funds of ` 20.67 crore and ` 7.21 crore has been released. The 2nd
Centre was inaugurated on 18th December 2015 at Rajkot Gujarat.

2 TBIs have been approved in the States of
Tamil Nadu (Thiruchirapally) and Maharashtra (Pune).

For creation and setting up of ASPIRE Fund
of Funds, ` 60 crore has been released to the SIDBI.

In the first year of the scheme, as of now,
LBIs and TBIs are set up/proposed across 12 States of the country including NER.

As on 15.01.2016 a batch of 217 incubates
involved in 8 different training modules have passed out from Deoria Centre and
another batch of 160 incubates are undergoing training. In the Rajkot centre, a
batch of 88 incubates are undergoing training involving 7 training modules


e-Office initiative has been introduced to achieve paperless office in the
Ministry. Movement of e-files has been started and digitalization of existing
physical files for converting the same into electronic files has been

Proposal for ISO
9001:2015 Certified Organisation: First ISO 9001: 2008 quality standards
have been adopted for the entire Ministry (first ever) and the processes
completed with M/s TUV India has certified the processes.

Mobile Friendly
Website: The website of the Ministry and Office of the DC MSME has been
made mobile friendly. With this, entrepreneur friendly content can be easily
accessed through any mobile and tablet and

Challenges faced:

• Access to finance
• access to markets
• technology and environment
• infrastructural bottlenecks
• access to people
• regulatory constraints and facilitationvi

Access to finance:

A credit gap of 56 per cent exists in the MSME finance
sector. While there is an estimated demand of INR 2,803,628
crore, the supply of finance stands at INR 1,038,948 crore, reveals a study
conducted by US-based Entrepreneurial Finance Lab (EFL),vii
with about 92 % of MSMEs lacking access to formal sector finance. Loaning to
MSMEs is costly for lenders because of the lack of detailed applicant credit
histories or other documented metrics of credit worthiness, subjective biases
such as familiarity with applicants; pressure to meet monthly quotas, banking
history, residential stability, marital status, and age. This includes loan
officers over-reporting client revenues because they need to meet sales targets,
natives being preferred over non-natives in most regions, likelihood of spouses
bringing in a second income, etc.

The government and non-governmental organisations seek to
finance and allocate resources for MSMEs, but these resources often do not
reach the targeted audience. The successful launch of the Jan Dhan Yojana (JDY)
could be used to direct financial resources to targeted MSMEs. There are
important things that can be learned from the case of Japan, where the
government has imposed a cap on interest rates on loans that a money lender
extends to MSMEs. Could an interest cap be imposed for lending to MSMEs in
India too? Is it possible for money lenders to be brought under regulation now?

In India, commercial banks are mandated to lend to MSMEs. In
such cases there is also a need to ensure that the public sector does not crowd
out the private sector.

Further, MSMEs generally suffer from poor conduct by major
banks. In some cases, mis-selling of financial products is a general complaint
of entrepreneurs. This can take the shape of higher fee or interest rate,
failure to explain exit costs, and sometimes threatening them with refusal to
extend regular credit. Therefore, the role of financial education is very
important for MSMEs in assessing appropriate start-up finance and in empowering
them to use financial products and services to manage risks and other business

Not all banks can do MSME financing as this is a specialised
area and requires specialised skills to assess the institutions that can
benefit from bank finance and yield higher production. Therefore, skill
development of bankers is also necessary for assessing MSMEs that can be
bank-financed. These skills would include standardising simple format for
accounting purposes for MSMEs, competent development of human resources,
cultivating business ethics and standards, and also imparting training to MSMEs
which are being served by the bankers. The initiatives by the RBI in this regard
need to be strengthened in instituting similar training programmes in different
commercial banks.

In addition to financing, there is a need for focussed
coordination of activities of different government authorities to encourage
MSMEs. This coordinating agency could serve in building a database and
repository information on a shareable basis, measuring levels of productivity
for different product groups, and identifying products in need of research and

Learning from JAPAN:

Accounting for 99.7% of all companies, 70% of all employees,
and more than 50% of all added value (manufacturing industry) in Japan, SMEs
form the very basis of the Japanese economy. Large corporations such as Toyota,
Honda, and Sony, which started as small factories have led Japanese growth and
business presence across the globe. Japan’s example reinforces the view that
SMEs can promote competition in the marketplace, creating new industries and
help enormously in economic restructuring. Japanese SMEs provide the key components
in major large-scale products, thus forming the backbone on which a large
corporation rests. SMEs support the service industry, retail trade, and the
construction industry, also revitalizing local economies and boosting
employment opportunities.viii

Financial Support: As SMEs have few assets and weak
financial foundations, it is difficult for them to procure capital from the
stock market, so securing a smooth supply of funds is one of their key
challenges. In Japan, government-affiliated financial institutions have been
established to create a system to provide SMEs with long-term funds at low
rates of interest. A system of credit enhancement has also been introduced,
given the limits to the funding that can be provided by public financial
institutions alone. This enables SMEs to make use of funds from private sector
financial institutions, as the government guarantees the loans taken out with
such institutions by SMEs and pays it back in subrogation if the SME concerned
does not. This system complements provision by private sector financial

Policy finance institutions targeting SMEs consistently
provide about 10% of all loans to SMEs. In combination with loans with attached
credit guarantees, public loans account for around 20% of all loans to SMEs,
mainly consisting of

policy loans (support loans for founding
companies or overseas business expansion) and

(ii) safety net loans (loans to companies
suffering a temporary downturn in business conditions or which have been
affected by a disaster (earthquakes, typhoons, etc.)) to SMEs.

In order to facilitate the supply of finance required by
SMEs, which lack creditworthiness and adequate collateral, credit guarantee
corporations (52 nationwide) provide private sector financial institutions with
guarantees for the debt obligations of SMEs. If the guaranteed debt is not
repaid, the credit guarantee corporation repays it in subrogation.

In order to support efforts to improve the management of
micro enterprises, which have few management resources and low productivity
even compared with other SMEs, unsecured low-interest loans are provided by the
Japan Finance Corporation, without the need for a guarantor.

GST: A step in the
right direction

The Goods and Services Tax (GST) could help enhance the
competitiveness of the almost five crore Micro, Small and Medium Enterprises
(MSMEs) by making them a part of organised commerce and offering them a
level-playing field through a simplified tax structure and a unified market. Also,
lower freight costs, lower cost of raw materials, and a lower tax burden can
help make MSMEs more cost-competitive. ix

MSMEs will also enjoy ease of doing business as there will
be no complexities in registration, limited  interface of bureaucracy as registration,
payments, input tax credit and tax liability adjustment, returns, and refunds
will now happen electronically, which will bring transparency in compliance and
will also reduce the compliance cost.

However, it is difficult for MSMEs to adapt swiftly to this
new tax regime and they will need to be educated about the various provisions
and compliance requirements under GST for MSMEs through seminars, conferences,
and training sessions.

opening of MSME intensive bank branches:

In order to increase credit availability to small
businesses, the finance ministry has asked public sector banks to open MSME
intensive branches. : Dec 17, 2017

Finance Minister Arun Jaitley in October had announced a  capital infusion of Rs 2.11 lakh crore to
enable the state-owned banks to play major role in the financial system and
give a strong push to the job-creating MSME sector, by strengthening the  banks that are reeling under high
non-performing assets (NPAs) or bad loans.x


Not all banks can do MSME financing as this is a specialised
area and requires specialised skills to assess the institutions that can
benefit from bank finance and yield higher production. Therefore, skill
development of bankers is also necessary for assessing MSMEs that can be
bank-financed. These skills would include standardising simple format for
accounting purposes for MSMEs, competent development of human resources,
cultivating business ethics and standards, and also imparting training to MSMEs
which are being served by the bankers.

Access to Markets:

To withstand the onslaught of competition from large
enterprises within and outside, MSMEs need to respond promptly to the evolving
marketing needs and innovations. The sector needs to be provided better market
access facilities in order to sustain and further enhance its contribution
towards output, employment generation and exports.

Technology tools like SMS, digital newsletter and electronic
direct mail can be used efficiently to target segmented population. Broadly
classified as push marketing, these media tools are cost efficient and easily
accessible. To add to this, websites, yellow pages, directory listings help
pull the prospective buyer with rational efforts. Trade fairs form another
important platform for MSMEs to venture into new territories and develop
businesses. The sector is required to look beyond India and innovate to market
their products internationally.

Access to Infrastructure:

There is a need for common infrastructure projects for
MSMEs. MSMEs, through coming together and sharing the costs of infrastructure,
which are otherwise prohibitive for individual MSMEs, could benefited from
economies of scale, synergy and collective bargaining by collaborating with
each other particularly on aspects of common infrastructure, common facilities,
raw material procurement, marketing & transportation of finished goods,
testing laboratory, common tooling/machining, Research & Development etc.

Basic infrastructure such as workspace and power, along with
water supply, waste management, etc should be made accessible to these MSMEs.

Local bodies may be encouraged to set aside substantial part
of the collections derived from industrial estates, to upgrade infrastructure
such as roads, drainage, sewage, power distribution, water supply distribution,
etc. for the existing industrial estates. Alternatively, industrial estates
could be notified as separate local bodies as envisaged in the Constitution and
entrusted with municipal functions that shall include levy of taxes,
responsibility to maintain the infrastructure within the Industrial Estate,

Access to people:

Talent Attraction: MSMEs need to be able to distinguish
themselves, create their niche brand and use it to attract talent.
Organisations need to highlight to the potential hires that MSMEs are growing
organisations and provide platform to the new incumbents to grow with the
organisation. It is imperative for MSMEs to make potential employees aware of
the fact that the exposure and the level of responsibility in a small firm are
much larger than that in a big firm. Recruitment channels such as referral,
internal transfers and graduate recruitment need to be implemented. It is
important that MSMEs keep the recruitment process transparent and clearly
communicate the key criteria for hiring a person and the key success factors
for his or her role.

Access to technology & environmental constraints

The technology transfer issues pertaining to MSMEs in
developing nations are very different from those being faced in the developed
countries like the US and UK. The absence of an enabling ecosystem which is
much required for facilitating an active interaction in the technology transfer
process is a major inhibitor for the sector. Other issues such as ‘limited
interaction’ between technology providers and technology seekers, minimal
knowledge about upcoming technologies, and the cultural and the regional
differences in the developing nations adversely affect the productivity of the
MSME sector.

Solution: Assistance from large firms: – involve large
enterprises in the development of MSME clusters: a long-term strategic plan
should be implemented by the Ministry of MSME to facilitate and build long-term
relationships with large enterprises and research supply institutes.

Regulatory Facilitation:

Schemes for Startups need to be designed

 manufacturers’ associations should be
consulted while formulating these schemes

 compendium of schemes should be prepared with
inclusion of application forms for each scheme

and a direct channel should be established between the Government bodies and
entrepreneurs in order to spread awareness on promotional schemes


No country has catapulted from a developing country to an
advanced economy without industry contributing significantly in output. So far,
the growth story in India has been different, with the services sector
overtaking industry in a short span of time. Building a sustainable and
widespread manufacturing base is necessary. The government could also consider
an appropriate guarantee system to be offered to the MSMEs availing loans under
various government schemes. To inspire confidence, the government needs to
strengthen the legal structure and establish a credible redressal mechanism. To
prepare a vision document and an achievable roadmap that can place the Indian
MSMEs to compete with those in China, Japan and Germany, there would be a need
to engage researchers, industry groups and stakeholders.
























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