Top 5 Challenges of MSME Loans

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While new government policies and initiatives attempt to close the credit gap, significant obstacles exist to obtaining MSME loans.

The informal sector makes a significant contribution to India’s economy.

There is no disputing that India’s growth heavily relies on MSMEs(micro, small and medium enterprises), which generate mass employment and contribute significantly to the GDP. Given its importance, the government offers adequate support to guarantee that MSMEs’ growth is not hindered at any time, particularly due to the COVID-19 pandemic that has brought major world economies to a halt.

Top 5 Challenges of MSME Loans

MSMEs were particularly hit hard during the shutdown since factories put their shutters down for more than two months between March and June.

Despite the government’s efforts to keep the sector afloat, the current economic scenario is unfavorable for small businesses due to a lack of liquidity in the system. Even though the government has implemented several financial measures in its economics, some loopholes still impede the sector from functioning correctly.

Let us now talk about the challenges faced by these MSMEs.

1. Inadequate knowledge of finance and modern financing solutions

Although entrepreneurs continuously build, innovate, and plan to expand existing businesses, many lack the financial understanding necessary to steer a company in the right direction. Entrepreneurs who lack fundamental finance knowledge may be unable to make critical business decisions with MSME loan. If one lacks financial expertise, they may make bad judgments that cause capital loss, and outside assistance or interventions may be needed. Market finance knowledge is crucial to reasonably use an MSME loan if required in an emergency.

Another issue with MSME loans is the impact of outdated regulatory standards, such as the requirement for small enterprises to get licenses, insurance, and certificates, among other things. MSMEs are unable to obtain finance on time due to such regulations. Due to a lack of trust and unfamiliarity with technology, many small firms do not employ commercial internet transactions.

2. Labour-related difficulties

Most MSMEs encounter everyday labour challenges. The ongoing migrant crisis has emerged as one of the most challenging problems for industries to function in a pandemic, especially in the new normal. To help both urban and rural micro-entrepreneurs, firms must focus on skill development, training, and establishing market linkages, in addition to labour issues. The emphasis on skill development can be highly beneficial to the sector, especially during a crisis.

In India, poor personnel management and inadequate training and development facilities are major issues. The labour markets in the area are highly rigid, making it impossible for MSMEs to operate successfully. Many businesses also complain about strained labour relations and a lack of workforce planning.

Apart from labour problems, businesses also need to emphasize skill development, training, and ensure market links to facilitate both urban and rural micro-entrepreneurs. Skill development can substantially benefit the sector and more so during crises.

3. Ease of doing business continues to be a stumbling block

The majority of Indian start-ups experience this issue in their early phases due to many rules and approvals. Although India has improved its ranking in the World Bank’s Ease of Doing Business index, various flaws in the system keep firms on edge and hinder expansion. Entrepreneurs are frequently discouraged from starting a business due to difficulties obtaining an MSME loan, enforcing contracts, or dealing with building permissions. The time it takes for firms to implement an agreement is still longer than during early times.

There have been substantial changes in registering a new firm, such as a decrease from 127 days to 30 days. However, local entrepreneurs still have to wait and complete 12 procedures to start a business in Mumbai, whereas globally, it takes five approaches.

4. Lack of confidence

Typically, MSME loans are for small amounts, and banks are hesitant to issue them. Furthermore, banks assume that MSMEs lack repayment capacity and, as a result, impose tighter requirements. Furthermore, new MSMEs are likely to have no credit history and are considered high-risk borrowers, affecting their ability to obtain a business loan.

5. Disbursement is a painful process

Traditional loan options frequently require business owners to meet stringent qualifying requirements as well as the furnishing of various documents. Furthermore, the loan application and subsequent crediting of cash for small company loans is a time-consuming and inconvenient process. This financing option is not viable when MSMEs require urgent loans to meet working capital requirements. This is why many people turn to alternative lending organisations like NBFCs, which are quick to grant loans and have lenient qualifying requirements.


MSMEs have proven to be the backbone of the Indian economy, spreading throughout a wide range of industries and contributing significantly to the country’s job creation. Many start-ups are springing up due to the digitalisation of the Indian markets and economy with government assistance. While attempts have been made to assist this sector’s growth, many small business owners still struggle to raise funds for their businesses. Consistent cash flow is required to successfully run a firm, from the injection of capital to the payment of operational expenses.

Small firms can borrow money from forward-thinking lenders who understand their specific problems and can provide customized solutions. Overall, to be safe, MSMEs should aim to keep their credit score high, keep their cash flow positive, have a sound business strategy in place, and compare several lenders before selecting one.

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