In fact, RBI's concept paper on trade receivables and credit exchange for financing micro, medium and small enterprises highlights that MSMEs in India face problems of inadequate finance.
This has more to do with a lack of options. In the post financial sector reforms phase, the performance and strength of the banking structure improved perceptibly. Credit cooperatives were created to cater to the credit, processing and marketing needs of small and marginal farmers organised on cooperative lines.
It is estimated that rural India had only 7 branches per 1,00, adults in in sharp contrast with most of the developed and even BRICS economies having over 40 branches.
World over, factoring is a preferred route of accessing working capital for SMEs and even larger organizations. Experts though say that embracing factoring services could give a real boost to India's exporters like it has done in many countries where factoring has gained acceptance. The growth response emerged a decade later as the cumulative impact of the gradual reforms began to be felt on the investment environment.
Small companies with lesser turnover, companies having high concentration on a few debtors, companies with speculative business, companies selling a large number of products of various types to general public or companies having large number of debtors for small amounts etc.
The sector accounts for 45 per cent of manufactured output and 8 per cent of the GDP. While letter of credit and overdraft are the most popular forms of financing amongst the Indian trade community, world over, sellers domestic and international have found more benefits going the factoring way.
In order to support an annual economic growth of 8 per cent, as envisaged by the 12th Five Year Plan, banking business needs to expand significantly to an estimated Rs. In the second phase, Roadmap has been prepared for covering remaining unbanked villages i.
Fund-based credit encompasses traditional lending methods such as loans, overdraft facilities, cash and pre-shipment and post-shipment finance while non-fund based credit includes letters of credit LOC and bank guarantees.
To bring matters into perspective, less than a percentage point of India's exports are backed by factoring services.