MSMEs in India: Role of Factoring as an alternative source of fund

MSMEs in India have been contributing significantly to the GDP and the growth of MSMEs is considered to be quintessential to the growth of the Indian economy. Currently there are around 49 million MSMEs contributing 8% of the GDP. MSMEs have been at the center of policy initiatives for the government of India. Despite their high enthusiasm and inherent capabilities to grow, MSMEs in India are also facing a number of finance related problems. Although MSMEs are considered as priority sector for bank financing in India yet most of the MSMEs rely on the traditional sources of funding. The demand and supply gap in financing needs for MSMEs is projected at INR 16331 billion in the year 2016–17. Present study is an attempt to explore factoring as an alternative source of finance for managing the working capital gap by releasing the funds locked in overstretched receivables. Factoring as a financial product has been in existence in India for several decades, however penetration of factoring in India particularly in the MSME sector is abysmally low as compared to other developing countries. This study is an attempt to address some of key challenges faced by MSMEs in raising finance and intends to bring to fore the role of factoring in facilitating quick access to finance by turning accounts receivables into cash. This study has also highlighted various initiatives taken by Government of India to supplement the efforts of factoring industry in India with a view to assist MSMEs in working capital management and help them to scale up.