A Study of the Factors Influencing the Financing Gap for the MSME Sector
Keywords:
Financing Gap, Information Asymmetries, MSME, Bank Finance, Credit RationingAbstract
Micro, Small and Medium Enterprises play a significant role in the socio economic development of a nation. They have a commendable role in generating employment opportunities for the youths of the nation. MSMEs need credit for expansion, modernization, diversification and to manage their day to day activities of the business. Even after making such an enormous contribution to the Indian economy, they are neglected by most of the banks and financial institutions. It is very difficult for a MSME unit to avail long term bank loan at an affordable rate, whereas, large enterprises can easily avail long term bank credit at lower interest rates. It has been well established in the literature that, as the size of the firm increases, its cost of formal credit decreases. The banks and the financial institutions hesitate to some extent in getting involved with the MSMEs because of the adverse selection and moral hazard issues. In most of the cases, banks require transparent information regarding the financial health of the firm and the manner, in which most of the MSMEs operate, makes banks doubtful regarding their financial condition. Majority of the MSMEs do not maintain proper financial statements of their transactions and operate in an opaque manner. The opaqueness of the firms makes it very difficult for them to avail formal credit. Information secrecy 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 financing gap in the MSME sector. Other major factors that lead to the financing gap in the MSME sector are market Imperfection, Bankruptcy Laws, Property Rights, Issues of Adverse Selection and Moral Hazard. The present paper attempts to identify various factors that influence the Financing Gap in the MSME sector and that lead to the imposition of Credit Rationing approach by the banks. This paper is based on extensive review of literature on Micro, Small and Medium Enterprises and a descriptive survey carried out on the bank officials in the districts of Varanasi and Chandauli. The results from the descriptive survey confirmed that the MSMEs are much more credit constrained than the large enterprises.
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