Problems in Availing Institutional Finance by Informal MSMEs in India with Special Reference to MUDRA Loans and Udyam Registration.pdf

Micro, Small and Medium enterprises are considered the backbone of India's growth. It is the second largest employment generator after agriculture. It is classified as the priority sector for accessing institutional credit and other benefits declared periodically. Yet, sourcing capital and accessing credit has remained a concern, especially for the unregistered micro and small industries where high levels of informality exist. Despite being a large source to tap consumers from, conventional complex lending requirements and procedures for loan approvals adopted by commercial banks have restrained them from funding this critical sector. Constrained by a huge financing gap Informal MSMEs at their end evaded regulatory compliances to keep entry and operational costs low coupled with a lack of awareness of the benefits of formalisation of business both of which have constrained them from achieving their full potential. The combined effect is a very high degree of informality. As high as 85% of MSMEs had not incorporated until June 2020 and had remained evasive to regulatory scrutiny and compliance. This paper reviews the constraints of the informal MSMEs from accessing formal institutional credit and the considerations of the financial institutions from lending to MSMEs. It also discusses the success of the government policy intervention to overcome the financial constraints of the informal MSMEs with special reference to ease of access to Mudra Loans through structural changes in lending practices and hassle-free Udyam Registration and how these two are transforming the MSMEs ecosystem and potentially driving the entrepreneurial spirit.<br>