Why in news? The government is considering a proposal to set up a separate bank for direct lending to the micro, small and medium enterprises (MSMEs). This is being planned to deepen credit flows to the under-penetrated sector and thereby boost economic activity and job creation.

What’s in today’s article?

• Micro, Small and Medium Enterprises (MSMEs)
• New bank to bridge credit gap for MSMEs

MSMEs in India:

• MSMEs are often called the powerhouse of the Indian economy as they contribute significantly to employment generation, exports, and overall economic growth.
• They reportedly account for more than 11 crore jobs and contribute around 27.0% of India's GDP.
• The sector consists of around 6.4 crore MSMEs, with 1.5 crore of them registered on the Udyam portal and employs around 23.0% of the Indian labour force, making it the 2nd-largest employer in India after agriculture.
• They account for 38.4% of the total manufacturing output and contribute 45.03% of the country's total exports.

Significance of MSMEs and Problems Faced by Them:

• Significance of MSMEs for Indian economy:
  • Labour intensive sector, promotes inclusive growth, leads to financial inclusion and promotes innovation. The 64 million-strong MSMEs are the backbone of the Indian economy.
• Problems faced by MSMEs:
  • 
  • Problem of dwarfism: While dwarfs (firms that continued to remain small despite ageing) consume vital resources (could possibly be given to infant firms), they contribute less to job creation and economic growth as compared to infant firms.
  • Lack of funding: Most (90%) of the MSME funding comes from informal sources.
  • Poor integration of digital technologies: Integration of technologies such as big data, AI and virtual reality (Industry 4.0) into manufacturing operations in the sector is still in its infancy.
  • Environmental impact: The sector lacks cleantech innovation and entrepreneurship, which produce environment friendly products, promotes energy efficiency and has the potential to accelerate the transition to a circular and low carbon economy.

New bank to bridge credit gap for MSMEs

• Proposal
  • Government is planning to set up a separate bank for direct lending to MSMEs.
  • Among the details to be worked out is the ownership structure of the bank, which might include a hybrid (public-private partnership) model.
• Current scheme
  • The Small Industries Development Bank of India (SIDBI) primarily provides refinance to banks lending to MSMEs, helping to lower the cost of finance for these units.
    • Established under an Act of Parliament in 1990, SIDBI's majority shareholders include:
      • Government of India (20.85%),
      • State Bank of India (15.65%), Life Insurance Corporation of India (13.33%), and
      • National Bank for Agriculture and Rural Development (9.36%).
    • SIDBI accesses low-cost funds from banks that fall short of their priority sector lending (PSL) targets.
    • SIDBI's growth prospects depend on the coverage achieved by scheduled commercial banks in meeting their PSL targets.
  • Additionally, state financial corporations and state industrial development corporations, among others, lend directly to MSME units.
• Need for new bank
  • According to a report, MSME credit penetration is still 14% in India compared with 50% in the US and 37% in China.
  • There is a credit gap of Rs 25 trillion for the Indian MSME sector, reflecting the large untapped credit market.
    • The outstanding credit to the MSMEs by scheduled commercial banks expanded by 20.9% annually to Rs 26 trillion at the end of December 2023.
  • Access to adequate, timely and low-cost finance is seen as a key bottleneck, stymieing MSMEs’ growth to bigger enterprises.
  • A separate bank which understands the needs and the working of the MSMEs is required.
    • Large banks don’t understand the requirements of the MSMEs.