The Problems of MSMEs

In one line

The typical Indian small enterprise cannot get credit at a reasonable price, is not paid on time by the large firms it supplies, cannot reach a market beyond its district, and has a reason not to grow.

In the wording a student can write in an exam: the problems of micro, small and medium enterprises in India comprise inadequate and costly access to finance, delayed payment by buyers, obsolete technology and low productivity, weak marketing and limited market access, infrastructural and logistical constraints, shortage of skilled labour, the burden of compliance and the persistence of informality, and a tendency to remain small in order to retain benefits, all of which reinforce one another.

Problem one: finance

The evidence. The Economic Survey 2025-26 states that access to formal credit remains a binding constraint for many micro enterprises because of limited collateral and documentation readiness, and cites the World Bank's Financial Sector Assessment Report for India of June 2025, in which 27 per cent of MSMEs identified finance as their biggest obstacle. It adds that women owned MSMEs account for a small fraction of commercial credit.

Why it happens, and this is the analytical part.

• No collateral. A bank lends against security; a micro enterprise typically has none, because its assets are stock and a leased shed.
• No records. Lending decisions rest on documented cash flow. An enterprise operating in cash cannot produce it, and the same informality that keeps it outside the tax net keeps it outside the credit system.
• The cost of assessing a small loan. It costs a bank nearly as much to appraise a five lakh rupee loan as a five crore one, so the small loan is unattractive at any interest rate the borrower can pay.
• The consequence. The enterprise borrows from a moneylender, a supplier or a relative, at a rate that absorbs its margin, and it therefore cannot invest in the machinery that would raise its productivity.

Problem two: delayed payment, and the statutory answer

This is the problem the Act was largely passed to solve, and it is the section of the chapter to write in full.

The scale. The Economic Survey 2025-26 records an estimated 8.1 lakh crore rupees locked in delayed payments, affecting working capital and restricting growth.

Why it is so damaging. A small supplier that has delivered goods has already paid for its materials and its wages. Until the buyer pays, it is financing the buyer, and it is doing so out of borrowed money at a rate the buyer would never pay. Delayed payment is therefore an involuntary transfer of working capital from the weakest firms to the strongest.

Section 15: the obligation. Where a supplier supplies goods or renders services, the buyer shall pay on or before the date agreed in writing or, where there is no agreement, before the appointed day. And the proviso: in no case shall the period agreed upon in writing exceed forty five days from the day of acceptance or of deemed acceptance.