The Reserve Bank of India (RBI) formed an expert committee in December 2018, to be chaired by U. K. Sinha, former Chairman, SEBI, to assess the challenges faced by the micro, small, and medium enterprise (MSME) sector and propose long-term solutions. The sector is crucial to India’s economy, contributing 45 percent to manufacturing output, 40 percent to exports, and about 28 percent to GDP while employing around 111 million people. Despite its significance, the sector continues to face challenges such as limited access to formal finance, delayed payments, fragmented supply chains, and lack of technological upgrades. The sector’s growth has also been affected by recent structural changes, including demonetization and implementation of the goods and services tax. The committee was tasked with reviewing these issues and providing actionable recommendations to enhance the financial and economic sustainability of the MSME sector. Members included Ram Mohan Mishra (Additional Secretary, Development Commissioner MSME); Pankaj Jain (Additional Secretary, Department of Financial Services, Ministry of Finance); P. K. Gupta (Managing Director, SBI); Anup Bagchi (Executive Director, ICICI Bank); Abhiman Das (Professor, IIM-Ahmedabad); Sharad Sharma (Co-Founder, iSPIRT Foundation); Bindu Ananth (Chair, Dvara Trust); and Surekha Marandi (Executive Director, Reserve Bank of India and Member-Secretary).
The committee highlighted severe constraints in financing, with MSMEs’ outstanding credit standing at Rs. 14.68 lakh crore as of March 2018. Of this, Rs. 13.24 lakh crore came from banks and Rs. 1.44 lakh crore from nonbanking financial companies. A credit gap persists, with many MSMEs dependent on informal credit sources. The committee recommended the creation of a low-cost lending window for State Governments for infrastructure projects in clusters. The committee recommended shifting from collateral-based lending to cash-flow-based lending, using digital platforms such as PSB Loans in 59 Minutes and leveraging data from the GST Network, PAN (Tax ID), and Udyog Aadhaar. This digital shift could reduce the turnaround time for loan approvals, currently averaging 31 days for public sector banks and 18 days for nonbanking financial corporations. Moreover, the committee emphasized creating a unique enterprise ID to centralize MSME data and streamline the credit-assessment process. The committee also proposed mandatory uploading of invoices to information utilities to address delayed payments to MSMEs, which represent a barrier to their cash flow.
In addition to financial reforms, the committee suggested improving market access for MSMEs through the Government e-Marketplace and enhancing their participation in global markets via cluster development and digital integration. It called for transforming the Micro, Small and Medium Enterprises Development Act of 2006 into a comprehensive MSME code to promote formalization and increase the ease of doing business. The report also highlighted the need for capacity building in the sector, with a focus on skill development, financial literacy, and digital adoption. To mitigate risks associated with delayed payments, the committee recommended expanding the Trade Receivables Discounting System and promoting trade-credit insurance. These measures, if implemented, are expected to provide much-needed relief to MSMEs, allowing them to grow sustainably and contribute further to India’s economic development.
The recommendation to create a low-cost lending window for State Governments was accepted, and the Small Industries Development Bank of India launched the SIDBI Cluster Development Fund towards the same. Cash Flow-based lending was also adopted by various banks such as the Punjab National Bank based on the recommendations of the committee.
