Small Businesses, Big Impact: Why MSMEs Are Key to India’s Growth Story

Mumbai, November 18: Finance Minister Nirmala Sitharaman urged the banking community to perceive Micro, Small, and Medium Enterprises (MSMEs) as a sector teeming with opportunities rather than just risks. Speaking at the 11th SBI Banking & Economics Conclave 2024, Sitharaman emphasized the transformative potential of cash flow-based lending to meet the working capital needs of MSME units.

In her keynote address, she highlighted the resilience of India’s banking system, characterized by cleaner balance sheets, robust earnings, and adequate capital buffers, making it well-equipped to support long-term projects.

“India’s economy, whether in its traditional or modern forms, heavily relies on MSMEs. We must remain sensitive to their needs,” she stressed.

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Financial Inclusion and Digital Literacy

The minister underscored the importance of digital financial literacy in fostering public confidence in digital transactions.

“Digital financial literacy must also be a priority to build public confidence in digital transactions. By addressing both the ‘access’ and ‘quality’ aspects of financial inclusion, we can ensure that all segments of society are part of India’s journey toward ‘Viksit Bharat,’” Sitharaman said.

She also credited initiatives like Jan Dhan Yojana and Direct Benefit Transfer (DBT) for their significant role in advancing financial inclusion. Over a decade, 54 crore Indians, including those in underserved areas, have been integrated into the formal financial system.

“From 2014, our government made an effort in bringing financial inclusion. As a result, financial inclusion levels rose significantly, with the number of adults with formal financial accounts doubling from 35% to 77% between 2011 and 2021,” she added.

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Advancing the MSME Sector

Sitharaman highlighted the importance of innovative credit assessment methods to support MSMEs.

“Traditionally, the banking sector has relied heavily on collateral-based lending models. This approach, while effective in certain cases, does not always align with the unique needs and financial structures of MSMEs. That’s why the Budget this year included the announcement of collateral-free loans for MSMEs,” she said.

The shift to cash flow-based lending models was noted as a game-changer, capable of addressing MSMEs’ working capital needs while fostering entrepreneurship and employment.

“The banking community should view MSMEs not merely as a sector of risk but as a sector brimming with opportunity,” Sitharaman asserted.

The Finance Minister also revealed ambitious targets for MSME lending. Beyond the Rs. 4.21 lakh crore estimated for FY2024, banks and NBFCs have been tasked with achieving an additional Rs. 1.54 lakh crore this financial year. For FY2025-26 and FY2026-27, lending targets have been set at Rs. 6.12 lakh crore and Rs. 7 lakh crore, respectively.

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Resilience of India’s Banking Sector

India’s banking sector, particularly Public Sector Banks (PSBs), has shown remarkable resilience. Sitharaman cited the following metrics to underscore this point:

• Operating profit for H1 FY25: Rs. 1.5 lakh crore, a 14.4% YoY growth.
• Net profit for H1 FY25: Rs. 85,520 crore, a 25.6% YoY growth.
• Gross NPA: 3.12%, and Net NPA: 0.63%, as of September 2024.
• Capital Adequacy Ratio (CRAR): 15.43%, exceeding the regulatory requirement of 11.5%.

These metrics affirm the sector’s capacity to finance large-scale projects while maintaining financial stability.

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India’s Global Aspirations

The Finance Minister reiterated the government’s commitment to making India the third-largest economy in the world. She highlighted the country’s robust foreign exchange reserves, which cover 11.8 months of imports and exceed 100% of external debt.

“Let me assure you all that the Government is closely monitoring the evolving situation. We remain committed to taking all necessary measures to ensure that India remains firmly on course to become the third-largest economy in the world,” Sitharaman concluded.