Page 1 of 19

Journal for Studies in Management and Planning

Available at http://internationaljournalofresearch.org/index.php/JSMaP

e-ISSN: 2395-0463

Volume 01 Issue 02

March 2015

Available online: http://internationaljournalofresearch.org/ P a g e | 30

The Widening Financing Gap and Micro, Small and

Medium Enterprises in India

Mr. Abhijeet Biswas

Research Scholar, Faculty of Management Studies, Banaras Hindu University

Varanasi (U.P) Pin code: 221005, India

E-mail: abhijeetniftblr@yahoo.com

Abstract

Micro, Small and Medium Enterprises are

widely spread throughout the globe and

constitute approximately 90% of the total

enterprises in most of the countries. They

are responsible for generating a major

share of employment. They contribute

significantly in industrial production and

exports. In India too, the role of MSMEs is

crucial in the overall industrial growth. In

the last few years, the MSME sector has

reflected a higher growth compared to the

overall industrial sector. Most of the

current multi-million dollar enterprises

have their origin in MSMEs. Nevertheless,

MSMEs in developed and developing

countries are still facing a number of

difficulties and obstacles that are impeding

and complicating their operations and

growth. Access to external finance to

MSMEs has become more costly and

troublesome while their accessibility has

sharply declined. MSMEs’financing

constraints limit their investment

opportunities and stagnant growth. Access

to finance is widely perceived to be an

essential factor for firms, and especially

MSMEs, to maintain their daily business

operation as well as to achieve long-term

investment opportunities and development

targets. The manner in which the financial

institutions and banks operate in the

developing countries is biased when

compare MSMEs with large enterprises.

MSMEs find it relatively harder to get

access to finance from these financial

institutions. Banks generally show lack of

interest when it comes to getting involved

with MSMEs. Timely access to finance is

one of the most important factors which

determine the competitiveness of MSMEs.

The present paper attempts to identify

various factors that are responsible for

Page 2 of 19

Journal for Studies in Management and Planning

Available at http://internationaljournalofresearch.org/index.php/JSMaP

e-ISSN: 2395-0463

Volume 01 Issue 02

March 2015

Available online: http://internationaljournalofresearch.org/ P a g e | 31

widening of the financing gap in the

MSME sector. The researcher tries to

highlight the various factors that

contribute significantly in Credit

Rationing for MSMEs. This paper is based

on extensive review of literature on Micro,

Small and Medium Enterprises. The

review showed that MSMEs are much

more credit constrained as compared to

the large enterprises and the financing gap

is widening.

Keywords: MSME, Constraints, Financing

Gap, Credit Rationing, Debt Demand

INTRODUCTION

Micro, Small and Medium Enterprises are

widely spread throughout the globe and

constitute approximately 90% of the total

enterprises in most of the countries. They

are responsible for generating a major

share of employment. They contribute

significantly in industrial production and

exports. In India too, the role of MSMEs is

crucial in the overall industrial growth. In

the last few years, the MSME sector has

reflected a higher growth compared to the

overall industrial sector. One of the

significant characteristics of a flourishing

and growing economy is a vibrant and

blooming MSME sector. MSMEs play a

pivotal role in the development of a nation.

They contribute to socioeconomic

development in various ways; namely, by

creating employment for a rural and urban

growing labour force and providing

desirable sustainability and innovation in

the economy as a whole. Most of the

current multi-million dollar enterprises

have their origin in MSMEs. Nevertheless,

MSMEs in developed and developing

countries are still facing a number of

difficulties and obstacles that are impeding

and complicating their operations and

growth.

In the last few years, the MSME sector has

reflected a higher growth compared to the

overall industrial sector. With its quick

responsiveness, adaptability and

innovative approaches in the recent years,

this sector has shown a commendable

endurance to survive the effects of

recession. In India too, the role of MSMEs

is crucial in the overall industrial growth.

With its quick responsiveness, adaptability

and innovative approaches in the recent

years, this sector has shown a

commendable endurance to survive the

effects of recession. The conventional

Page 3 of 19

Journal for Studies in Management and Planning

Available at http://internationaljournalofresearch.org/index.php/JSMaP

e-ISSN: 2395-0463

Volume 01 Issue 02

March 2015

Available online: http://internationaljournalofresearch.org/ P a g e | 32

wisdom argues that the inadequate

financing of MSMEs is to a significant

extent rooted in supply-side features. The

manner in which the financial institutions

and banks operate in the developing

countries is biased when compare MSMEs

with large enterprises. MSMEs find it

relatively harder to get access to finance

from these financial institutions. Banks

generally show lack of interest when it

comes to getting involved with MSMEs.

Timely access to finance is one of the most

important factors which determine the

competitiveness of MSMEs.

Access to external finance to MSMEs has

become more costly and troublesome

while their accessibility has sharply

declined. MSMEs’financing constraints

limit their investment opportunities and

stagnant growth. Access to finance is

widely perceived to be an essential factor

for firms, and especially MSMEs, to

maintain their daily business operation as

well as to achieve long-term investment

opportunities and development targets.

The onset of globalization, with expanded

regional economic integration in the

context of East Asia, has intensified the

competitive pressures on regional MSMEs

in both domestic and international markets.

Despite their perceived weaknesses,

related to their relatively small size and

limited resources, the region retains a

dynamic, entrepreneurial and increasingly

internationalized MSME sector (Hall,

1995, 1999, 2002). MSMEs have not been

swept away with the process of

globalization and regional integration, but,

rather, their role and contribution have

evolved as they attempt to retain a

competitive position in the domestic and

global marketplaces (Harvie, 2002; Harvie

and Lee, 2002, 2005; OECD, 2006a). This

has involved the adoption of effective

business strategies in response to global

competition, as well as meeting the needs

of the new economy with its emphasis on

knowledge, skill and innovation as key

sources of competitiveness. Those

enterprises most able to respond flexibly

and adaptively to rapidly changing

regional and global markets will be the

most successful (Harvie, 2002). A critical

issue is how best to ensure that they fully

participate in the business opportunities

that will present themselves, including the

adoption of international strategic alliances

involving other MSMEs and participation

in global and regional value chains, or

production networks with multinational

enterprises. Knowledge and production

networking participation by MSMEs

enables them to combine the advantages of