According to a survey undertaken by the Confederation of Indian Industry, nearly 63 per cent of Indian MSMEs use debt financing for their long term financial needs. In the short term, however, the reliance on debt is even more profound with close to 78 per cent of MSMEs relying on debt as compared to 22 per cent on equity.
“Lack of options to explore equity financing, absence of exit route and a lower cost of debt are the key reasons why the Indian MSMEs have been looking at debt as the main source of funding their business operations,” stated Chandrajit Banerjee, Director General, CII. However, proposed launch of the SME Exchange is expected to give a fillip to the options for exploring equity finance, such as IPOs, Venture Capital, Private Equity etc, he added.
The CII survey also shows that nearly 85 per cent MSME entrepreneurs are using bank overdraft facility or cash credit facility, while the rest are using ECB (External Commercial Borrowings), Commercial Paper or bonds. On the other hand, the very few that are using equity are mostly reliant on common stock.
Cost of credit is a major worry area, as revealed by the survey, as many of the MSMEs feel that exorbitant interest rates are going to have a negative impact on many of the business processes, such as capacity expansion.
With dwindling profits it becomes increasingly hard to invest money in developing new products or allocate funds for branding and improving the current products. On average 57 per cent of the respondents think that in coming months this aspect of their business would suffer as well.
Also, nearly 90 per cent of the respondents believe that the current interest rate regime in India is worse than those facing their counterparts around the world.
