Page 14 - IMDR MSME BOOK 2021

Managing Finance in Micro, Small & Medium Enterprises
Chapter 1

Introduction to MSME
Introduction
Micro, Small and Medium Enterprises (MSME) play a
signicant role in the socio-economic development of a
nation. They have played a creditable role in generating
employment opportunities for the youths of the nation.
Indian MSME sector has emerged as a highly vibrant and
dynamic sector of the Indian economy over the last ve
decades which has played a vital role in removing
regional imbalances and creating new opportunities in
rural and sub-urban areas. MSME sector has
complemented to large scale industries in the socio-
economic development of the country.
MSMEs need credit for growth, renovation, and
diversication and to manage their day-to-day activities
of the business. Despite their massive contribution to the
Indian economy, they are deserted by most of the banks
and nancial institutions. It is not easy for MSME unit to
avail long term bank loan at an affordable rate in
comparison to large enterprises. It is evident that as the
cost of fund decreases, the size of the rm increases. It
has been observed that banks and nancial institutions
have reported doubtfulness in the transparency of
information regarding the nancial health of the most of
the MSMEs. Majority of the MSMEs do not maintain
proper nancial statements of their transactions and
operate in an obscure manner. The lack of transparency
in managing nancials of the rms makes it very difcult
for them to avail formal credit. Information concealment
maintained by the MSMEs compels the banks to impose
credit rationing on the loans being sanctioned to the
MSMEs. The imposition of Credit Rationing by the banks
further widens the nancing gap in the MSME sector,
which is followed by market imperfection, bankruptcy