MSMEs in Tamil Nadu had better access to short-term funds

CRISIL studied the performance of 208 micro, small, and medium enterprises (MSMEs) based in the southern states of India - mainly Tamil Nadu, Andhra Pradesh (including Telangana), and Karnataka - rated during 2013-14 (financial year April 1 to March 31). The study was aimed at understanding the sources of working capital finance for these MSMEs. The study revealed that Tamil Nadu-based MSMEs had better access to short-term funding from financial institutions, as compared to those in the other states.

The analysis reveals that funding from bank borrowing for working capital requirements has been higher in the rated MSMEs based in Tamil Nadu at 51 per cent, followed by Karnataka at 44 per cent, and Andhra Pradesh at 35 per cent. Credit from suppliers for these entities was found to be in the range of 22-27 per cent. The remaining shortfall was covered by promoters' contribution, which, in case of Andhra Pradesh, went as high as 43 per cent. Even though MSMEs in these states enjoy access to financing, there is still substantial scope for financial institutions to increase their exposure to this sector.

MSME owners generally have limited access to credit. This forces them to borrow from unregulated lending markets or from their suppliers; consequently, they end up paying much higher interest. This not only leads to overpricing of products but also limits the MSME owners' ability to add value, upgrade technology, maintain quality, and adopt modern management techniques. Thus, availability of credit at affordable cost is critical for Indian MSMEs.

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Note: CRISIL has rated over 50,000 MSMEs in India. This fortnightly tracker presents to our readers insights on MSMEs, a key element of the Indian economy.