In India’s economy, the MSME sector is rapidly expanding. The Micro, Small, and Medium Enterprises (MSME) sector is the country’s economic growth engine. MSMEs foster entrepreneurial growth and diversification in the industrial sector, as well as adding depth to the economy’s industrial foundation. MSMEs play a critical role in creating huge numbers of jobs at a cheaper cost of capital than major corporations.
In our strategic expansion plan, the Bank has placed a significant priority on funding MSMEs. The possibility for MSME finance has grown even more now that the government is committed to giving this sector a boost through infrastructure development, skill set development/entrepreneurship development, and technological upgrades, among other things.
The amount of money needed to pay operational expenditures is known as working capital requirement (WCR). It is a representation of company’s short-term funding needs. Gaps in cash flows (money coming in and out) relating to cash inflow and cash outflow linked to business operations, or company’s principal activity, are the source of these requirements.
Working capital limitations for MSE units are calculated based on a minimum of 20% of their expected turnover up to a credit limit of 5 crore, according to the Nayak Committee Report. A 90-day working capital cycle is taken into account in this analysis. Due to the stretched working capital cycle, MSE units’ working capital requirements are on the rise in light of the current economic climate.
As a result, the IBA advises banks to rethink their policy on lending to MSEs under turnover-based assessment and increase working capital limits from a minimum of 20% to a maximum of 25% of expected turnover in order to fulfil the additional working capital need. In addition, to encourage digital transactions under a turnover-based assessment, the IBA has urged banks to assess MSE units with working capital limits of up to 5 crore with a working capital limit of up to 30% of expected turnover.
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