World Bank approves $500 million loan for MSMEs

2 March 2015 – The World Bank approved a $500 million loan for the MSME Growth Innovation and Inclusive Finance Project to improve access to finance for Micro, Small and Medium Enterprises (MSMEs) working in the manufacturing and services sector, including start-ups and early stage ventures. In India for example, MSMEs account for over 80 per cent of total industrial enterprises, employ an estimated 60 million people, and contribute around 45 per cent to manufacturing output and about 40 per cent to exports.

India's start-up ecosystem is currently one of the fastest growing in the world and the third largest start-up base with 3,100 start-ups (after the United States with 41,500 start-ups and the United Kingdom with 4,000). While there has been incredible growth in equity financing in the Indian ecosystem, debt financing is non-existent for the majority of the vast growing start-up enterprises.

Lack of adequate finance is one of the biggest challenges facing the MSME sector, as financial institutions have limited their exposure to the sector due to a higher risk perception, information asymmetry, high transaction costs, and the lack of collateral.

"With 8 million people entering the labour force every year, MSMEs have the potential to create many new, innovative jobs. However, for these ideas to take shape, MSMEs will need easier access to finance. This project will develop innovative products that address such constraints and help them achieve their true potential," explains Onno Ruhl, World Bank Country Director in India.

Growth Innovation & Inclusive Finance Project

The MSME Growth Innovation and Inclusive Finance Project will support MSMEs through direct financing by the Small Industries Development Bank of India (SIDBI), as also through Participating Financial Institutions (PFIs) across three components. These include support to start-up debt financing and risk capital as well as support to service and manufacturing sector financing models.

"Access to formal financing is challenging as financial institutions are yet to develop appropriate risk assessment frameworks to assess enterprises that fall under the MSME sector. Traditional banking based on collateral lending does not cater well to these large, innovative and dynamic segments of the Indian economy", said Niraj Verma, Lead Financial Sector Specialist and the Task Team Leader for the project.

"Thus, despite its contribution to GDP, its potential is not fully realized and many firms are unable to grow sufficiently. The introduction of customized products with innovative financing mechanisms will help unlock the market for lending to MSMEs at all stages of growth, including start-up firms."

Source: World Bank